I recently came across an interesting online article, which I find very interesting and worth sharing with my readers. The article touts developing a savings and investment culture, which many of us are unable to do because of our tendency to a loose spending lifestyle.

The article, which is authored by Eric Whiteside, reviewed by Chip Stapleton and fact checked by Timothy Li, talks about a book titled ‘All Your Worth: The Ultimate Lifetime Money Plan’ authored by US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi. Whiteside’s article is based on the ‘50/30/20 budget rule’ written about in the book.

Whiteside says the rule is to split one’s after-tax income into three parts of spending:  50 percent should be on needs (necessities), 30 percent on wants (things that are not necessities, but make life enjoyable and entertaining), and 20 per cent on savings and investment.

Applying the ‘50/30/20 budget rule’ effectively requires smart spending. We often spend more money on things not because we need them, but because we imitate the lifestyles of our peers, colleagues, neighbours and friends. 

For instance, X may visit Y at his or her house and finds that Y has bought a nice musical system and asks how much it costs and where the shop he or she bought from is situated. When X leaves his or her neighbour’s place, rushes to a bank, draws some money and off he or she goes to the shop where Y bought his or her musical system and buys it even if X didn’t need it, but simply because he or she saw that Y had one. 

Had X budgeted his or her money well he or she wouldn’t have bought the musical system because X had not planned to buy it. We find ourselves in a situation similar to X’s and spend more money on the things which are not on the list of our priorities. 

This is another example. S may go to a reaction centre where S meets family friends. When S arrives sees T who is a neighbour, and recalls how generous T treated S. This makes S show gratitude to T, buys a few beers to T, and to other friends, including a bar attendant. 

What S has done was also not on the list of his or her priorities, but did it just to show gratitude to his neighbour and generosity to those who are with the neighbour, including the bar attender. Obviously, X and S as are the majority of us spend money without the ‘50/30/20 budget rule’ in mind. 

According to this budget rule, Whiteside says, ‘50 per cent spending on needs’ include, but not limited to, rent or mortgage payments, car payments, groceries, insurance and healthcare, minimum debt payments and utilities. “Needs,” he says “are necessary for survival. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.” 

Moreover, he says ‘30 per cent wants’ include, but not limited to, new unnecessary clothes or accessories like handbags or jewellery, tickets to sporting events, vacations or other non-essential travel, latest electronic devices, and ultra-high-speed internet beyond one’s streaming needs. 

“Basically, wants are all those ‘little extras’ you spend money on that make life more enjoyable and entertaining.” Then, Whiteside says ‘20 per cent savings’ include creating an emergency fund, making contributions to a mutual fund account, investing in the stock market, setting aside funds for buying physical property for long-term holding, and making debt repayments beyond minimum payments. 

“Try to allocate 20 per cent of your net income to savings and investments. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road,” he says.    

Talking about needs and wants during an interview I had with Diligent Consulting Ltd Senior Consultant Sosthenes Sambua, he said “a person cannot live without basic needs, but can live without wants.” However, he said a person could enjoy life better when his or her wants were met as well. “So, both basic needs and wants should be studied, established and analysed before a person starts [savings or spending],” Sambua says.

Consumerism is the habit of spending goods and services without weighing its costs. We can reduce the poverty we have if we develop a savings and investment culture – smart spending. 

We may recall a Kiswahili saying “Mali bila daftari hupotea bila habari” (Wealth without a ledger disappears without information). Whiteside says sticking to the ‘50/30/20 rule’ puts us at a competitive edge as far as budgeting, spending and savings is concerned. He suggests that “the rule can be simplified by setting up automatic deposits, using automatic payments, and tracking changes in income.” 

He adds that the idea behind the ‘50/30/20 rule’ is that anyone can apply it, regardless one’s income. However, he advises that those with lower income (pay) or those living in areas where the cost of living is high may need to adjust the percentages to suit their situation. 

All things considered, developing a culture of savings and investment is a noble idea and the ‘50/30/20 rule’ or making adjustments to it to suit individual contexts may help us manage well our finances, raise our family incomes, and attain our financial wellbeing.