Something you will never need to learn is how to spend money. It’s so easy. But saving that dough is tough.
That’s because saving is a learned skill and, like most skills, it takes time and repetition to become a habit. However, if money-management and budgeting can become a habit, it will ensure a chance of achieving any financial goals.
Budgets are about more than paying your bills on time – they are also about determining how much you should be spending, and on what. It’s hard to implement a system, but there are great benefits of applying simple principles to spending.
A long-gone principle used was ‘The Rule of Thirds’; a great way to begin saving and make it a habit. It was an excellent method that showed that small, consistent savings really can add up over time. Three small divides to help savour the joy.
‘The Rule of Thirds’ had been a popular saving technique for years, and many within the Tavistock Investments Group remember it helping them get their foot into the investment market.
Chris Halford, Tavistock Investments Group’s Marketing Director, recalls being brought up on this concept.
“I was a youngster living with Mum and Dad and during my first job, a Friday night ritual was to open my weekly wage packet (a small square brown envelope) and take out one third and put it in my pocket.
The remainder I would hand to my mother. She took a third and put it in her purse for ‘keep’. She then went to the bank on a Monday and paid the remaining third into my bank savings account. In other words, one third of the money for bills, one third for savings, and one third for me.
A year or so later, my savings habit enabled me to put a £250 deposit on my first house. That particular ritual came to an end, as I was the one who now had to go to the bank to pay into my mortgage account!”
Like Chris, many now struggle to maintain the habit of budgeting when they fly the nest. Times have changed with the cost of living on the increase, and a third of any wage now seemingly can’t cover all necessities, as well as pay rent, mortgages and bills.
Nowadays, twenty-somethings have a new formula to help work out their wage splits; 50/20/30. This aims to help those just starting out to negotiate the complicated world of personal finance and teach that discipline can make budgeting a very simple task.
By staying close to the core concept, you can begin to gain financial ground, not lose it.
The divide explained
50% of income put aside for essentials
This sounds like a high percentage but covers a lot of day-to-day necessities. These essentials include all things you have to pay, regardless of where you live or any future plans you have in mind, such as housing, food, transportation costs and bills. There’s room to adjust within this percentage as each individual circumstance requires slightly different spending. For example, some people live in high-rent areas yet can walk to work, however others enjoy much lower housing costs but spend more on transport.
20% of income put aside for savings
Dedicate 20% of your payslip to savings. This is the smallest amount of the divide however it is your “preparation category”. The term “retirement” might not be pressing when you’re young, but it will be over time – starting early is how you will earn compound interest to grow your investment even further over time. Read more about this in our “Invest Young”, or “Understanding the J-curve” blog.
30% of income put aside for personal
This is the one that we can all enjoy – the unnecessary expenses that make life just that little bit sweeter. In modern society, this category has become somewhat mandatory, however completely depends how you choose to live your life. It covers lots of things that nowadays could move to “essentials” – phone plans, cable bills, clothes shopping, but only you can decide which of your expenses becomes a “luxury”. However, the fewer costs you have in this category, the more progress you can make in securing a safer financial future.
This is a money habit that doesn’t need to be taken too literally, but if carried through, can establish a firm foundation of good financial management for the rest of your life.
Now you can have your dough-nut, and eat it too.