How you can allocate your income to set yourself up for success in 5 simple steps:
1. Write down your after-tax income.
If you are employed, this is the amount on your paystub before it is allocated to any subaccounts. If you do not have your paycheck broken out into subaccounts, it is the amount of your check or direct deposit.
If you are an independent contractor or self-employed, this is the amount of your income less what you set aside for taxes. If you are not sure how much you need to set aside for taxes, 30% is the default number in the USA (probably higher in European countries and Canada).
2. Multiply your after-tax income by 10%.
If your after-tax income is $100, this would be $10.
You are going to place 10% of your after-tax income into each of the following accounts or envelopes:
Investing (“future me”)
Education
Play
Savings
and 5-10% in Giving/Tithing
3. Move those amounts from your general checking account to the designated accounts or withdraw cash from the bank and put it in each envelope.
4. Do you have something special you want to save for? A vacation, new car, new house, boat, RV, horse, wedding, new baby, etc? Create an account for it and allocate a pre-determined amount!
5. Automate it!
This method works best if you automate it. Either set up automatic transfers or make the transfers before you start spending the money that was deposited.
So, what are the accounts for?
Investing
This is for your future. The options are limitless.
If you have an employer-sponsored retirement plan, you may want to participate up to the amount your employer will match and invest the difference on your own.
You could invest in stocks, bonds, funds, certificates of deposit, annuities, insurance, cryptocurrency, etc.
Remember, you want something that is likely to outpace inflation and invest based on your risk tolerance, not the way you think you are “supposed” to invest.
Education
This is for you to keep learning.
You can apply it toward student loans or upcoming courses, conferences, workshops, or even a coach. If you are not learning and growing you are dying so choose wisely!
Savings
This is your emergency fund.
Ideally it will be equal to 6-12 months of expenses, but even $1,000 can make a big difference if you get a flat tire or the furnace dies. Once you reach your maximum you can allocate this money elsewhere.
Play
This is for you to have fun. Think eating out, mani-pedis, shopping, massages, your favorite latte, or whatever else brings you pleasure!
Giving/Tithing
This is what you give away because you are so thankful you have more than enough for your needs (and wants!).
You choose who to give it to- it could be a favorite charity, someone who needs a little help, your house of worship, or even a random stranger on the street.
As you can see, some of the expenses currently coming out of your general checking account will now be paid by these special accounts. But, for the accounts that are allowed to accrue, you will be amazed at how quickly the balances grow.
It has been scientifically proven that there is a psychological advantage to breaking out your income into these separate accounts.
What if you cannot meet these percentages? That is the topic for tomorrow!