What is 25% Rule in Personal Finance

Posted by Mayank on April 2, 2014 in Personal Finance

There are many personal finance websites and tools available, but there is none when it comes to personalization of the same. Because no two person can have the same income and expense in each category, it is a challenge to understand and make sense of the suggestions and incorporate them in your personal life.

Adding to the pain is the fact that there are so many spending options that balancing personal budgets is a tedious and time-consuming process. These days, though, the task has become even more challenging. The best way out is to use simplicity and when it comes to your budget and use what Money Talks News suggests an easy approach: the “25 Percent Budget Strategy.”

There are 4 major components of your expense and writer Mitchell D. Weiss provides an easy way to before-tax income and divide it into four general categories: taxes, housing, debts and living expenses.

  • The first 25% – Taxes: 25 percent is a general number for taxes, but for most of us, it’s pretty accurate.
  • The second 25% – Housing: Weiss suggests that your monthly rent or mortgage payment shouldn’t be more than one week’s worth of pre-tax salary.
  • The third 25% – Debts: According to Weiss, your monthly loan payments shouldn’t be more than 25 percent of your pretax monthly salary. It is easier to get loans when your credit use is 25% or less and it becomes harder when it starts to approach 30% or above.
  • The last 25% – Living Expenses: The last 25 percent will have to take care of everything else, including an emergency savings stash. Ideally, that should total no fewer than six months’ worth of rent, debt and living costs. If your living expenses are higher than 25% of your pre-tax salary – it is time to take stock of your spending habits.

Weiss explains that quartering your budget into these categories can start you in the right direction and give you a general idea of how your income should be allocated.

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