When you first get a job, change your income, or just start thinking about where to put your money it’s easy to get lost. It’s easy to spend, but if you’re reading this you probably know it’s wise to save. Where should I put my money? How much can I spend? Do I put more in Long term or Short Term savings? All are great questions.

Where Your Money Can Go

A good place to start is understanding your options. In general, you can spend your money today or you can save it for later. In more detail, here are the options I consider.

For spending…

• Income Taxes – not many options here.
• Health Care – everyone should allocate some money to health/vision/dental insurance.
• Personal Spending – includes rent/mortgage, utilities, car insurance, and any other spending towards your activities and possessions.
• Charity – most importantly, the amount of money you give to invest in your communities will signify your impact in this world. Additionally, your dependence on your money is inversely related to the amount you give away.

For saving…

• Short Term – any money you put aside for big gifts, projects, trips or purchases that don’t fall in your month to month spending.
• Mid Term – money put aside for big purchases down the road like a car or house down payment.
• Emergency Fund – provides for 3-6 months of income if you lose your job or have a sudden cost like a medical emergency.
• Long Term – money that will support you in retirement when if your income drops off.

Target Allocation

Now that you understand where you can put your money, the next step is to understand how much you put in each bucket. This will depend on your goals and lifestyle, but here are some ideas on where to start.

• Income Taxes (15-20%) – Obviously, you don’t set this other than choosing where to live.
• Health Care (2-5%) – Depends on the size of your family, what your work offers, and what you need covered.
• Personal Spending except Rent (Max 25%) – House aside, aim to keep the costs for your utilities, food, entertainment, gas, etc. under a quarter of your gross income. The higher this gets the more you put yourself at risk if you lose your job.
• Rent/Mortgage (Max 25%) – This is easier to control than personal spending because you can easily set it before moving into a place. When buying a house be sure to consider insurance, taxes, and escrow on top of your loan.
• Charity (Min 5%) – A lot of people give here and there when something bad happens, but I strongly advocate picking charities or churches and giving on a regular basis. If you regularly donate time and money to an organization you will be able to have an impact that will reward you and others throughout your lifetime.

• Short Term (0-10%) – Since this isn’t as critical as longer term savings there is no minimum. Once you understand your goals you can more easily calculate how much to put here.
• Mid Term (0-10%) – You may need a new car or be planning to purchase a house so plan accordingly. Additionally, if you ever plan to start a business down the road or invest in a great idea, a mid term savings account can be helpful.
• Emergency Fund (Mid 5%) – Until you have built up a 6 month cushion for living expenses in case of a job loss, keep adding to the emergency fund. Even if you have enough, consider filling it up to 12 months of living expenses for more support.
• Long Term (Min 10%) – Although you don’t know what kind of financial situation you will be in when you are older, it’s wise to plan ahead and save at least a tenth of your gross salary. The more you put in here now the sooner you can retire.

These numbers assume no debt. In the case you have a lot of debt, focus on paying it down quickly by significantly cutting back on spending and mid-term saving.

As you come across more money, try to find ways to keep expenses low while increasing saving and giving. Your money is more of a tool that you get to use to invest in the people and places you care most about. If you are only investing it in possessions then the return in life is small, but if you invest it in developing others and yourself then the return will be great.

Map Out Your Goals

In order to decide on the right allocation, you must consider your goals and needs. If you know you will need a car or plan to purchase a house soon, you may need to put a little more into mid term savings. Likewise, if you want a really secure retirement then focus on long term. In the end, try to find ways to reduce your need to spend so that you can focus on bigger things.

While writing this, I took a look at my expenses and realized that I want to aim higher on investing in others through charities and in friends through inexpensive yet entertaining activities.

Don’t believe this is all possible? Take a look at the Free Money Finance blog to see someone who cut back on spending so much they now give away 40% a month and love it.

Next Week

I’ll finish “Learning What to Spend and Where to Save” with advice on where all these buckets belong to help you maximize your savings while constraining risk. Be sure to subscribe online or via email to stay tuned.

Part 2 is online at Learning What to Spend and Where to Save – Part 2

Let me know what you think or how you allocate your money in the comments section down below.