Elizabeth Warren, named by Time Magazine as one of the 100 most influential people in the world coined the “50/30/20 rule” for savings and expenses with her daughter Amelia Warren Tyagi.
Here’s their recommendations on how to split your income.
Step 1. – Calculate your after-tax income.
This is the money that goes into your bank account each month and easy to identify on your payslip.
If you are self employed it is important that you differentiate between your personal and business finances, so it is a good idea to pay yourself a salary into your personal bank account out of the business finances. This is particularly useful if you are a commission earner and your business income is erratic. The personal income in your private bank account is then treated as a normal salary.
Step 2 – Keep track of your spending for a month.
Write everything down, from the big expenses like your home repayments or rent to the coffee you grab in the morning on your way to work.
Step 3 – Identify your needs. (essentials)
You need to differentiate between your needs and your wants. Needs are payments you need to make that severely impact your quality of life. You need to eat. You need a home. So, things like groceries, housing, utilities are needs. A car repayment is also a need since it gets you to work and back each day; or at the very least you need to budget for transport. If you have a credit card the minimum payment each month is a need, as it can negatively impact your credit rating if missed.
50% of your net income should be set aside for your needs.
Step 4 – Cap your wants at 30% of your net income.
Wants include DSTV premium, haircuts, dining out, clothes, movies etc. You might find you spend more on wants than you think, which is why its important to write them all down.
Step 5 – Consider your financial goals
What are you saving for? Your kids’ education? Retirement? Or, is your immediate goal to be debt-free? 20% of your income should go towards achieving these goals.
Why does this concept work?
It keeps things simple. Your finances are split into 3 categories with a maximum % to contribute so you know where your money is going each month. It is flexible, if you spend less on your needs you can save more for the future, make the plan work for you.
The key to maintaining consistency in your finances is to take action and manage your money each month. Save for the future and have enough to enjoy life today.
If one of your goals is to repay your debt but you feel you are over-indebted, contact us today.