US senator Elizabeth Warren is currently in the news as a potential US presidential candidate for the Democratic party. But long before becoming involved in politics, Ms Warren was a Harvard professor and a highly respected expert in law and economics.
In 2005 she wrote a book, with her daughter, which popularised a particular method of budgeting — the 50/30/20 rule. I remembered the rule this week while thinking about ways to take a new approach to one’s own finances.
Many of us get that ‘fresh start’ feeling in September, perhaps even more so than in January. The motivation to make changes comes a little easier in these crisp early autumn days than in the depths of winter.
So if you do have that new-school-year energy, and would like to apply it to your finances, one option to consider is to take the 50/30/20 rule and see how well your current spending pattern fits into it.
The basic rule is to divide your after-tax income into three streams — spending 50% on needs and 30% on wants while saving the final 20%.
Proponents recommend you be strict about what are wants versus needs. Needs are things that are necessary for the survival of you and your dependents — shelter, transport, food, etc. So your mortgage or rent goes in this category, as does food shopping, car payments, fuel and utilities. Insurance, including health insurance, is also included in needs.
But food shopping doesn’t include an expensive takeaway coffee habit or eating out. These are wants and should go into that 30% stream. The 20% ‘savings’ element of your budget can also be referred to as being for financial goals.
So if you have built up debt and are paying it down, you can include it in this category, as it is improving your long-term financial situation. Similarly, if you make a pension contribution that is taken out by your employer before you get your net pay, you can add this back into the 20%.
The ‘long-term’ part of the financial situation is key when deciding where to place certain expenditures. For example, if you move money into an online savings account as you get paid, it must be part of the 20%, right? Not necessarily. What are you saving that money for? If it is for a long-term goal — deposit, education, major house renovation — then absolutely.
But if it’s for a holiday in two months’ time, then really that is a want and it should be included in the 30%. Similarly, if you are considering upgrading your car or phone or other gadget, even if the current one is working, should any repayments really be classed as needs?
The point of the above examples isn’t to make you feel bad about the holiday — there is absolutely nothing wrong with prioritising and spending your money on things that you want and will get pleasure from. But when it comes to distinguishing between long and short-term goals, the 50/30/20 rule can be a very useful way to give you a fresh look at how you are spending your money.
I think it is something many of us can be a little oblivious to, even if we worry about or at least think about money quite a lot on a day-to-day basis. This is about taking a step back and looking at the overall picture.
The rule won’t be appropriate for everyone. Currently, particularly in our cities, Irish renters are stuck in situations where covering all needs out of 50% of take-home pay is complete wishful thinking. Conversely, someone in a position to save heavily may be putting away far more than 20% for a short or medium-term period while building a deposit for a mortgage.
So, if you are looking to get a better handle on your finances, why not sit down and see how your spending tracks to this rule? Keep an eye on things for a couple of months to see how consistently your spending fits into the categories. If you are far out of whack in some categories, maybe you can look at it as a prompt to see if you can get your saving up, or address other issues.
Even if you never end up conforming to the rule, and decide that’s fine for you, you’ll have a clearer picture of your finances. And that is never a bad thing.
September is National Deaf Awareness Month and to encourage more people to have a hearing test, Blackberry Hearing will be giving a free One4All gift card worth €25 to every over 65-year-old that goes in to them for a hearing test this month.
“As we get older many of us will experience a gradual deterioration in our hearing,” said Matthew Gleeson, from Blackberry Hearing.
“It is important for us to raise awareness of the importance, especially for those over 65, of getting their hearing checked. Research has shown hearing loss can be linked to other serious conditions.” He said if the test reveals any problems, the clinicians will show people how easily the problem can be solved with a hearing aid.
“Of course if your hearing is fine you’ve got a voucher as well as invaluable peace of mind,” he said. Blackberry Hearing is an Irish company with more than 70 clinics. You can find a clinic near you at www.blackberryhearing.com.