Here’s how much of your income should be spent on necessities, according to Ramit Sethi

A couple pays their bills over the phone and in cash at home.

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If you follow his advice, you’ll have plenty of money left over to pursue your financial goals and spend guilt-free.

Key points

  • When your needs take up too much of your income, it can put you in a difficult financial situation.
  • Ramit Sethi recommends spending 50-60% of your net salary on fixed costs.

Your necessities, often referred to as fixed costs, are the expenses you must pay. Rent, groceries, utilities, and debts all fall into this category.

These are the most important expenses, because you cannot stop paying them at any time. If you’re trying to save more money, you can avoid eating out or going to the movies. You can’t do that with things like your house or car payment, which is why you don’t want them taking too much of your income.

So how much of your income should you spend on necessities? Ramit Sethi, who provides personal finance advice in his book and website, says 50-60% of your take home pay should be spent on fixed costs. And he has a spending plan he recommends to make managing your money easier.

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How to split your income

Sethi advises everyone to make what he calls a conscious spending plan. The name is because you consciously choose how to spend your money. This plan consists of dividing your net salary into four tranches as follows:

  • 50% to 60% for your fixed costs: As we saw earlier, fixed costs are your essentials.
  • 10% for your investments: These include your 401(k), IRA, online brokerage account, and any other investments you have.
  • 5% to 10% for your savings goals: Your emergency fund, a down payment on a home, and other items you want to save for fall into this category.
  • 20% to 35% for guilt-free spending: This category is your fun money, and it covers anything that’s a want, not a need. Examples include going out for meals, new clothes, and entertainment expenses.

One of the great advantages of this plan is its simplicity. You don’t need a complex budgeting system where you log every transaction and analyze things down to the dollar. Instead, you add up your expenses and see if they fit within these guidelines.

What to do if you spend too much on necessities

Ideally, you’ll do the math and find that the fixed costs are 60% or less of your take home pay. But don’t feel bad if that’s not the case for you. Many people are spending more on necessities, especially after this year’s cost of living crisis. There are several ways to work around this problem.

To get started, adjust the spending plan based on your current income and fixed costs. If you spend 80% of your income on essential expenses, use that last 20% for investments, savings goals, and guilt-free spending. For example, you could spend 5% on your investments, 10% on your savings, and 5% on guilt-free spending. Try to have at least something in each category so you don’t overlook any areas.

This gives you a workable solution here and now. Going forward, look for ways to reduce your fixed costs and/or increase your revenue. Here are some ways to do it:

Depending on your financial situation, spending 50% to 60% on necessities may require some tweaking, or you may need to make it a long-term goal. Either way, it’s a good target to aim for. When you’re not overspending on essentials, you’ll have no trouble making ends meet. It will also leave you with enough disposable income to build wealth, save money, and also have money for fun.

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