Friday, June 26, 2020

50/30/20 Rule: How I'm Applying It Now



The 50/30/20 rule is a convenient guideline for anyone with an income. In an environment where one is constantly bombarded by product advertisements such as the latest phones, lifestyle trends etc. it can be very easy to succumb to your temptation and buy something you don't need. 
Enter 50/30/20 Rule.

This rule advocates dividing your income into three separate, broad categories. Half your income (50%) is used for essential needs; 30% on lifestyle/wants; 20% on savings and investments.
An quick example would be: if John earns $5,000 a month, $2,500 would be budgeted for his essential needs, $1,500 on his wants and lifestyle and the remaining $1,000 on savings and investments. This all seems easy on paper. But we all know that life is not that straightforward.

Personally, when I started work at 26 (I mean full-time, 8am-6pm job), I chanced upon this and I assumed it would be easy enough to follow. I knew I had a wedding, a future home and renovation to save for. All these were important goals and I knew I had to work my way to it. However, as I fell into the trap of delaying the tracking of my expenses or even budgeting. I fell way behind. I hit some savings goals but missed others. Now I am playing catch-up.

To make up for lost time, I have been reshuffling which categories the percentages apply to. Right now, I am saving and investing an estimated 50% of my monthly income. The rest I spend on essentials. Having a child and knowing that someone else is dependent on you for their survival is really a wake-up call (I'm not advocating having a child just to experience this epiphany). But my wife and I really had a shift in mindset in recent times on what to do with our finances and we are setting goals and checkpoints to ensure that we are on track.

So, is the 50/30/20 rule for you? It can be! As I mentioned earlier, this rule really just serves as a guideline and you can be flexible to adjust the proportions allocated to each category. The critical point is once you have fixed a certain spending/saving/investing rule, stick with it. Maybe do a review after 6-12 months but keep going at it. It is pointless to change month after month because you won't be forging your financial discipline nor will you know what is working for you.

In the next couple of posts, I'll be sharing how we plan to tackle our upcoming BTO loans, the importance of a family financial 'summit' and how I am tracking my expenses.

Share with me your thoughts and comments on the 50/30/20 rule and things you like to read about!

SG FI Dad, out.




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