The pandemic has affected virtually everyone.
While many of us perhaps lived without taking too much notice of the pennies, this event has highlighted the value of a clear and definite strategy for our income, allowing us to weather storms better. For this reason we wanted to share a principle of budgeting that can help determine whether your budget is future proof. Its called the 50/20/30 rule, where 50% goes to essentials, 20% to financial goals and 30% to wants. While this broad rule holds true it needs to be tweaked depending on where you are in life. This falls into 4 major life stages.
Similar to the life cycle of a caterpillar, each stage follows the next. Usually we start at the “SETUP” stage. We need to establish ourselves and our families and this means less available to spend on Wants. It typically involves living from pay check to pay check where any unexpected expense or missed income is a problem.
As you read this you also realise that some people live in the SETUP phase their whole lives, and that’s one of the reasons we started our Instagram account with: Once Upon a Rand – to change that.
In the SETUP phase, besides there being less than the ideal 30% set for Wants, the Financial Goals section is filled with debt repayment and very little, if any, asset creation/savings and investment.
Someone who feels trapped in this phase, needs to take a long hard look at his Needs and see what changes can be made to allow for more to be directed to Financial Goals, as that is the only way to get to the next phase. One of the reasons this doesn’t happen is the seeming opaque world of investment creates distrust and therefore a lack of commitment to making them work. This is another thing we strive to change, to make investment as clear and understandable as possible, so that it can be seen as more of a tool than a hopeful black hole.
The next phase is ACCUMULATION. It’s called this because it includes a substantial portion of your income going toward building assets. These assets could be a sellable business, property or an investment portfolio.
It is also characterised by less panic, which is probably the best way to determine if you are here or not. In this phase there is often more than 20 of the budget going to Financial Goals, and less going to Needs. Also the type of spending here is on savings and investment and less on debt repayment.
The next phase is DECUMULATION- usually associated with retirement – where the assets are now slowly reducing to provide you an income. Again the 50/20/30 rule can’t apply definitely, since there is now very little if any going to saving/investment.
The last phase is DISTRIBUTION, which most people in SA never reach, and that is the phase where you realise your assets will outlive you, and you need to determine the next way to distribute these for the next generation.
Unlike the caterpillar, these phases are not always certain. Unexpected events can derail the regular progress through these phases. Also it is seldom clearly age related, as most people start out very differently and may only enter the accumulation phase much later in life.
The important thing to do here is realistically determine where you are, and create a definite plan to make progress.