The simple definition:
The plan’s basic rule is to divide the after-tax income, spending 50% on needs and 30% on wants while allocating 20% to savings.
For a much detailed explanation, here are the steps:
1. Determine your After-Tax Income.
Okay, so you’ve just received your salary and you’d want to find out what your After-Tax Income is. The simplest way to do this is by looking at your pay slip and deducting the amounts of tax, benefits, and healthcare (HMO) from your overall salary. The remaining amount would be your After-Tax Income. Easy right? Well, the next few steps are the real deal.
2. Allocate 50% of your After-Tax Income to your needs.
Simply put, divide your After-Tax Income in half. One half would be allocated to your needs, such as electricity, water, food, and even rent. Basically, anything that you wouldn’t be able to live without can be considered a need (though nowadays, even an internet connection may be considered a need, especially for work-from-home employees).
3. Limit your wants to only 30%.
Remember when we divided the After-Tax Income into two, with one half being allocated to your needs? Now, focus on the other half and take 30% from that, that 30% should be allocated to your wants. This does not mean you’d have enough for a new cellphone, luxury vacation, or even a car (more on that later); however, it may be used for, perhaps, the basic details of life that you enjoy, that cable bill, monthly streaming fee, and even that fancy restaurant across the street.
Take note that if ever there are leftovers from the 30%, you may set those aside for the other luxuries we had mentioned before, such as cellphone, luxury vacation, and new car.
4. Set aside 20% for your savings and debts.
No one wants to be indebted for long, hence you should set aside money for your debts and other unpaid balances. The 20% may not be enough, but just like the 30%, if there are leftovers from past cut-off payments, then you may accumulate the amount, and then pay them in full in the future. The advantage in this is, once everything has been settled, you’d finally be able to save up for future uses and other emergency expenses.
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