By now, you should have received your first paycheck for the new year. Let’s hope that you are not one of those whose salary will simply flow through their account, and be used to pay off bills from their holiday spending, or worse, long-running debts.
Let’s also hope you were not tempted into spending during the many sales and promotions announced over the weekend.
Financial experts recommend a 50-30-20 rule when it comes to a sustainable spending and saving plan. This budget rule is aimed at helping you to spend wisely and save smartly. With only 3 numbers to remember, that’s 50 percent, 30 percent and 20 percent, it is much easier to track your budget and to have three mental buckets to manage both your spending and savings.
This rule is not new but US Senator Elizabeth Warren made it popular when she wrote about it in her book “All Your Worth: The Ultimate Lifetime Money Plan”. Basically, after income taxes and all other mandatory government contributions, split what is left of your salary into three spending categories: 50 percent on needs, 30 percent on wants, and 20 percent on savings. It’s fairly simple math, but in case you need help, check out Nerdwallet.com and their neat online calculator to help you compute.
50 Percent for Needs
What makes the rule successful is its simplicity. Whatever you make, you can spend half of it on your needs. That includes all your basic necessities such as housing, food, clothing, medicines, transportation, utilities and others. Note that this is for basic necessities, so food does not cover fine dining and gourmet coffee, and clothing does not mean designer labels.
30 Percent for Wants
What most people like about this rule is that they have 30 percent to spend on their wants. You work hard, so you also deserve to be rewarded. You can spend for road trips, salon visits, gym classes, concert tickets, among others. A more technical term for wants is discretionary expenses, meaning they are not essential to your survival, but likely important for your mental health.
20 Percent for Savings
What many find the hardest to do is to actually set aside 20 percent for savings. Others try to compromise and reduce it by half to 10 percent, or even as low as 5 percent. While the 50-30-20 rule is not set in stone, and you can have some wiggle room among the 3 categories, I would highly recommend that you do your best to keep savings at 20 percent, and only take away from it if 50 percent is not enough for your needs, and you have also carved out from your wants.
So in cases of medical emergencies and your needs will require 70 percent of your income, cut the wants by half and take the rest from your savings pot. Avoid sacrificing your savings goal and not touching the wants category. The more money you save today, the more money you will have in the future, and the more protected you are from life’s uncertainties.
The best point about this rule is that you will spend only what you have. Even if you can’t always keep to 50 percent for needs, or 30 percent for wants, what’s important and healthy for your wallet is that you are not spending more than what you earn, and learning to live within your means.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.