Kristen Bell, Tyra Banks, Sarah Michelle Gellar, Sarah Jessica Parker, Leonardo DiCaprio, Jennifer Lawrence and Paul McCartney are all fans of the 50/30/20 Rule. In fact, the rule has worked for millions across the globe and helped save ordinary South Africans money. Senator Elizabeth Warren popularised the 50/20/30 budget rule in her book All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide after-tax income, spending 50 percent on needs and 30 percent on wants while allocating 20 percent to savings. Achieving this, however, can be tricky, especially if you are living hand-to-mouth every month. We chat to Elize Botha, Managing Director of Old Mutual Unit Trusts, for advice on how to realistically bring this rule into play.
Scrutinise your salary:
It is important that you analyse your pay slip so that you know exactly how much money you have after income tax and deductions like medical aid and pension contributions every month. Make a list of your fixed expenses such as your bond and car repayments and variable expenses, such as groceries and entertainment, so that you know how much money you can put away in a saving or investment vehicle every month.
To reach our financial goals, it’s often helpful to remind ourselves of what is most important to us. Every person is unique, and our relationship with money is often complex. When we’re working towards something that’s important to us, we’re often more willing to work harder to reach our goals. You need to be very realistic with your savings goals, as you still have to meet your monthly financial obligations. However, it is very important to establish how much you can afford to spend on miscellaneous items without harming your life goals like going on that once-in-a-lifetime holiday, the kids’ education etc.
Get clued-up on investing:
First-time investors who are currently saving cash in a bank account are better off investing in a unit trust over the longer term, given that unit trusts are designed to preserve the inflation-adjusted value of saving over the long term. For those investors concerned that unit trusts aren’t as easily accessible as bank savings accounts, this is far from the truth. One of the key benefits of unit trusts is the liquidity of the funds. Should you need access to your capital, you can have cash within a few days. The barriers to entry are also low as, contrary to what many believe, you don’t need a huge sum of capital to invest, with some unit trusts offering a minimum monthly investment of as low as R500 or a lump sum investment of R10 000. You can also stop contributing at any time without penalties if economic times are hard while you stay invested in the market.
Don’t live on credit:
Financial freedom and the security it brings is attainable by South Africans. Financial freedom starts with eliminating all your debt and lowering your living expenses. Saving enough money to be financially free may feel like a ‘long shot’, but the first step is always the hardest. The value of financial freedom is that you will not be a prisoner in a job you might not appreciate or caught in an endless debt trap. A rule of thumb is never to spend more than you earn.
When it comes to cars and housing:
Don’t buy a house that costs more than three years’ worth of your gross annual income. Some variations say no more than two years; others say two and a half. When buying a car, you should put down at least 20 percent. You should finance the car for no more than four years and spend no more than ten percent of your gross income on transportation costs.
Don’s spend frivolously:
Overspending and utilising expensive credit to buy the things we don’t often need can put you in debt. What people don’t realise is that the real secret to financial freedom is to keep your living expenses as low as possible. Constantly increasing your credit limit as your income increases only serves to keep you further away from financial freedom.