With so many financial obligations, how are we to balance spending and saving? Angelique Ruzicka shares a plan for budgeting success…
It’s not surprising to hear that most of us dedicate 72% of our hard-earned cash to debt, according to 1Life’s 2017 survey. They also found that 23% is being spent on treats and other incidentals, leaving only 5% for savings.
But how much savings should be put aside monthly? How much of your salary should be going to the essentials, from buying groceries to paying bills? And will there be any cash left over to do what you actually enjoy?
The 50/20/30 budget rule
In the book All Your Worth: The Ultimate Lifetime Money Plan, former Harvard professor Elizabeth Warren and her daughter Amelia Warren Tyagi popularised the 50/20/30 budget rule to help us achieve financial balance.
The basic premise is that you divide after-tax income into various pots, using 50% for ‘needs’, 20% for savings and debt repayments, and 30% for ‘wants’.
Why try it? It’s not about unrealistic expectations, such as turning you into a millionaire on a small salary. What it offers is an end to the worry of counting every cent, helping you curb overspending, ease debt and, ultimately, boost savings.
50% for your needs
Needs are goods or services that’d have a huge negative effect on your way of life and general well-being if you didn’t have them. Think food, housing, healthcare and electricity. But minimum debt repayments are also a ‘need’, as paying less or not paying at all can dent your credit score, creating a poor financial future.
Set up standing orders for bills so cash earmarked for them isn’t used elsewhere.
Want to cut back on needs? Start in the kitchen – a site like supercook.com finds matching recipes from popular cooking sites based on ingredients you have, so that nothing goes to waste.
20% for savings and debt
Alexander Forbes consultant Rita Cool agrees that 20% is a good goal, though you need to start saving sooner rather than later.
“Start doing this from age 20, and at 65 you’d get to a salary replacement ratio of 75%; start saving this amount from 30, and you’d only replace about 49% of your salary at 65.”
Loads of products can help you invest for the long- and short-term. “Tax Free Savings Accounts are ideal for smaller amounts. For long-term growth, choose a retirement annuity to maximise savings, as you get tax back on those contributions and aren’t taxed on the product while it’s growing,” explains Rita.
As for debt repayments, this covers any amount paid over and above the minimum instalment, which is a ‘need’. Even adding an extra R100 towards your debt will see it paid off quicker, freeing up your cash sooner and saving you interest in the long run.
30% for your wants
‘Wants’ covers haircuts to Netflix, aerobics classes to special meals out, Christmas presents to clothing (the basics are a ‘need’. That designer dress? A ‘want’). They are things you could live without but make life worth living!
Cut back on wants by doing an ‘audit’. Money spent on a gym you only attend once a month could go towards a holiday if you cancel the gym contract and try running in your local park, for free, instead.
Websites like dealzone.co.za show bargains on treats like spa pampers – that’s the way to savvy ‘wants’ spending.