Earn more money or spend less is a straightforward strategy you can use if you are having trouble saving money.
This article serves as a helpful reminder that you must either reduce some expenses or take up a side part-time activity that will allow you to make extra money to increase your disposable income and aims to explain how people can spend less than they earn as many people find it challenging to attain their savings goals.
We shall use the budgeting principle known as 50/30/20 Rule of Thumb, popularised by Elizabeth Warren and Amelia Warren Tyagi, (2005) in the book 'All Your Worth'.
The 50/30/20 rule of thumb is a way of allocating your budget according to three categories: needs, wants, and financial goals. It is not a hard-and-fast rule but rather a rough guideline to help build a financially sound budget. It is vital to note that there are other budgeting guidelines depending on your income level and willingness to save as follows:
The 80/20 Rule which advocates that 80% of income is for living and other expenses without any tracking involved while 20% is set aside as savings.
The 70/20/10 Rule that advocates for 70% of income to cover living expenses, 20% debt payment, and 10% is set aside for savings.
However, this article focuses on the 50/30/20 Rule and its applicability to the Botswana economy grappling with effects of COVID-19 pandemic and the Russia-Ukraine war.
As a general rule, one should allocate his/her budget as: 50% to 'needs', 30% to 'wants', and 20% to your financial objectives. Depending on your unique situation, your percentages may need to be changed depending on your choices such as religious expenses which require individuals to decide whether it is a need or a want. The rule does not actually track your budget for you but assists in planning.
Setting up a budget using the 50/30/20 rule of Thumb
1. Determine your monthly Income Income is defined as total disposable income from multiple sources, such as work, dividends, and distributions provided by investments, rents obtained from property ownership, and profit sharing from a business or profession. For couples, the income consists of total earnings from both parties.
2. Calculate a Spending Threshold for each category From the total income determined in stage 1, compute the amount for your needs by multiplying by 50%, the wants by 30%, and finally, the 20% goes towards your financial goals/savings.
3. Plan your Budget around these numbers Consider these three spending areas as 'buckets' that you can fill up with regular outgoings. Check to determine if you are spending less than the monthly spending goals you set in the previous stage by listing and totalling your monthly expenses under each category, they belong.
4. Follow the Budget Keep tabs on your expenditures each month and adjust as necessary to stay inside your budget moving forward as this will assist as follows:
i) A budget helps you know your real financial situation. ii) A budget helps you to create a boundary around your finances. iii) A good budget maps out a path for your savings. iv) A budget creates a sense of accountability. v) A good budget helps prioritise (needs vs wants). vi) A good budget and adherence to it, can keep you out of debt or help you get out of debt. vii) A good budget controls your money instead of your money controlling you
Common challenges that negatively impact on saving
Despite the will and zeal one may have to follow the above rule, usually there are some challenges which may negatively impact on the plan, especially in this time of the pandemic and the economic turmoil bedevilling the current macroeconomic outlook. The world at large is presently feeling the negative impact and so is Botswana and its citizenry. Common challenges include but are not limited to:
1. Not leaving within one’s own means 2. Impulse buying 3. Lack of budgeting and planning 4. Over borrowing 5. Lack of knowledge 6. Extra marital affairs/multiple partners
Savings
Savings can be divided into two categories: ordinary family money and savings for a specific project. A part of your salary can be designated for general savings for either of the two or both.
You can use independently managed savings accounts or tools like contributory plans or insurance policies. Nevertheless, give yourself rewards occasionally and treat yourself because life is too short. It is, however, prudent to maintain a certain cover of your basic commitments, recommended at three months' cover, especially in the current economic situation. Finally, examine your spending patterns and reduce unnecessary spending.
In conclusion
Risks should be evaluated in your personal and family matters. It is of paramount importance to note that life is full of unknowns which include deaths, illnesses, job losses, mishaps, thefts, and robberies among others. Consequently, preserving a high level of savings can be handy to mitigate such risks be it life, medical, legal, or asset and that is what the 20% bit of the 50/30/20 rule does. It balances the long-term personal financial requirements while preserving financial freedom.
*Njanji, Nenguke, and Thusabantu are in the Department of Accounting and Finance, Faculty of Commerce—Ba Isago University.
