Many people don’t know how much of their money goes towards each of their expense categories. Others are savvier and have a pretty good grasp of the rand amount they spent on various expenses. The next level of know-how is knowing the percentage of money that goes towards each expense category. This can be more useful than knowing the rand amount, because it allows you to implement some good rules of thumb, like not spending more than 30% of your income on housing, or implementing the 50/30/20 budgeting rule.
It also allows you to see if your spending is accurately reflecting your priorities. For example, if you value your children’s education highly, but you find yourself spending only 2% of your income on saving for their tertiary education while spending 15% of your income on eating out, then you’ll get a good idea of how to get your spending more in line with your priorities.
Let’s look at how to calculate the percentage of your income that goes to an expense.
Take the monthly expense in question and divide it by your total monthly income. Multiply it by 100 to express it as a percentage.
As an example, let’s assume someone earns R18,000 a month and spends R850 a month on a cellphone contract. You would calculate the percentage of your income that goes towards your cellphone as follows:
In this example, 4.72% of the person’s income is spent on their cellphone. If this person values having a nice phone with all the bells and whistles, then no problem. But if this person values travelling, then maybe 5% is too high and they should consider reducing this expense and use the savings towards their next holiday.
Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.