If you find yourself struggling to save anything by the end of each pay cycle then it might be time to find solace in a budgeting rule.
Harvard bankruptcy expert and US Senator Elizabeth Warren coined the 50/30/20 budget rule for Americans, but the same philosophy might prove note-worthy for New Zealanders too.
The rule outlines that one’s income after tax should be divided between spending 50% on needs, 30% on wants and 20% on savings.
Needs consist of your non-negotiable monthly payments such as rent or mortgage repayments, grocery bills, utility bills, health insurance and car payments.
Your wants would be made up of disposable income that can be spent on entertainment, shopping for non-necessities and any planned vacations.
This would leave your final 20% for a savings account or debt repayment, according to Warren, who was named one of the 100 Most Influential People in the World by Time magazine.
In theory this system would work in New Zealand if we didn’t have such a high percentage of the population on low or living wage jobs and if rental prices weren’t so high.
“If you are in that ‘low or living wage’ bracket this rule is not going to work”, says Centre Director of the Westpac Massey Fin-Ed Center, Pushpa Wood.
“If you look at just housing, there is a crisis in New Zealand so people are paying up to 60% or 70% of their income on rent alone and you cannot compromise on rent.
“You might be able to negotiate your mortgage payments and you can negotiate what you eat and spend on entertainment, but not on rent. So in an ideal world this rule is great but in reality it doesn’t work”, Wood says.
Wood recommends instead to be flexible around certain areas but still to target at least 10% of your income towards savings and debt reduction.
“My dream has been to get people into that thinking mode of having some buffer as an emergency fund, which would be your savings account.
“Our biggest problem with low income families is that they don’t have an emergency fund so they are constantly chasing their own tale and if the car breaks down they have a problem. It’s hard to get out of that cycle”, Wood added.
However, Woods says there are high income earning New Zealanders on $100K to $150K salaries who are also struggling financially and could adopt Elizabeth Warren’s rule.
Woods’ advice to people on higher sustainable incomes is to keep track of spending, see where the leaks are coming from and future proof their savings account.
“Wealthy people can be saving 20% of their income. Entertainment is still a choice and can be negotiable but again rent is a necessity, so see what you can cut back on after your fixed costs are paid and savings are banked ”, Woods added.