“It takes as much energy to wish as it does to plan.” (Eleanor Roosevelt)
A lot of people don’t like budgeting. Many try it for a few months but give up because it’s too inconvenient. They feel it restricts their enjoyment of life and leaves them feeling guilty about spending.
Household budgeting also often falls to women, who feel this adds to the many pressures they are already under. It is one more responsibility that they could do without.
And, in reality, being responsible with money is not about counting every rand. It should rather be about having a good sense of where your money is going, what things you need to prioritise, and making sure that you are taking care of your future.
Global financial services group Fidelity has therefore come up with a simple ‘guideline for saving and spending’. Rather than a strict budget, it provides a framework for how to structure your finances.
The 50-15-5 rule
Fidelity’s solution is the 50-15-5 rule.
It recommends that no more than 50% of your take-home income should go towards essentials – your housing, food, healthcare, car expenses and childcare. You don’t have to worry about every item but try to keep all of it below half of your income.
The reason to keep it under 50% is that some of these expenses fluctuate. You are likely to spend more on electricity in winter, for instance. Or, as we know all too well, the petrol price can go up.
Start by looking at which essential expenses really are the most important. You might find there are some where you can cut back.
The next 15% should go towards saving for your future. Whereas the first 50% should be seen as a maximum, this is really a minimum.
This includes any contributions to a company pension fund, retirement annuities, tax-free savings or other kinds of investments.
If you are below this figure and it feels difficult to save more, do it incrementally. Every year, commit to saving a bit more of your income so that you push towards that 15% over four or five years.
The 5% is for short-term emergency savings. If something goes wrong and you lose your job or are unable to work for a significant period of time, you don’t want to compound the problem by not having a financial buffer. If you run into a big expense like needing major repairs on your car or house, you also want to be able to pay for that without running into debt.
A good way to think about getting this security in place is to see it as a monthly bill that you have to pay until you have saved the equivalent of six months’ salary. You might even want to set up a debit order so that this happens automatically.
It may feel difficult to cut back on some spending to do this, but you will be incredibly grateful that you did if you ever need it.
The other 30
Of course, 50 plus 15 plus 5 only gets to 70% of your income. The other 30% is therefore yours to spend at your own discretion.
This takes away some of the feeling of being burdened by a budget. You don’t have to think about every bill and every payment. You just need to think about staying within the rules for each component.
To discuss managing your spending and saving, speak to a professional.