How immigrants can walk the tightrope between spending and savings.
Why do a lot of people run into debts or go broke after making a pile of money? According to the credit rating agency, Equifax, the average Canadian owes $73,532, up from 2.2% last year. Total consumer debt now stands at almost $2 trillion. In the US, it’s at a record of $14.3 trillion.
Is there a secret to money that will solve our money problems for good?
Sadly, there is no magic formula to make all our money worries disappear. But there is a rule of money that could help.
It is the 50-20-30 budget rule – an intuitive and straightforward plan to help people reach their financial goals.
Senator Elizabeth Warren popularized the so-called “50/20/30 budget rule” in her book, All Your Worth: The Ultimate Lifetime Money Plan.
The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.
Here’s how it works.
50%: Needs
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, and utilities.
These are your “must-haves.” This category does not include extras, such as movies, Netflix, Starbucks, dining out or the latest iPhone.
At least half of your income should be set aside to cover your needs and obligations. If you are spending more, you will have to either cut down on wants or downsize your lifestyle.
Alternatively, you can find a way to increase your streams of income.
30%: Wants
Wants are all the things you spend money on that are not absolutely essential but add up to make life more enjoyable.
This includes eating out, seeing the movies, entertainment, fashion, clothing, tickets to sporting events, vacations, gym memberships, the latest electronic gadget, and more. The list can be as endless as your imagination.
Anything in the “wants” bucket can be optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out or watch sports on TV instead of getting tickets to the game.
This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes or BMW instead of a Honda or Ford, flying business class instead of economy.
Clever advertising has made the line between needs and wants more blurry. But the margin between both categories is still quite evident.
20%: Savings
Finally, try to allocate 20% of your net income to savings and investments. This category includes adding money to an emergency fund in a bank savings account, making RRSP contributions, investing in the stock market, and other investments.
A general rule of thumb is to have at least three months of emergency savings on hand at any point in time. After that, focus on retirement and meeting other financial goals down the road.
Hoping to win a lottery one day is a dangerous financial strategy.
The 4% Rule is another saving guideline worth taking note of. As the name implies, this rule of thumb asserts that withdrawing 4% of your retirement savings each year (adjusted for inflation after the second year) is the best way to ensure your retirement funds won’t run out before 30 years.
Enjoy life but watch the bottom line
The 50-20-30 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement.
Saving is complex, and life often throws unexpected expenses at us. For immigrants, it can be more challenging as they often need to remit money to loved ones abroad. Total global remittances currently stand at over $583 billion every year, with money transfers from Canada accounting for 5 percent of this amount.
Even with so many competing demands, following the 50-20-30 rule will help you stretch your hard-earned money a little further.
Life should be enjoyed, and it is not recommended to live like a Spartan, but having a plan and sticking to it will allow you to cover your expenses and save for retirement while doing the activities that make you happy at the same time.
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