The 50-30-20 Rule

With our new "Monthly Newsletter" it is our desire to illustrate for you some actual client situations.

This month we're going to speak about "Jim" (not his real name.)

Jim asked for a meeting just before Christmas to try and plot out his "financial" future. Looking at his banking – Jim came to realize he was always in a position of "more month than money" and wanted that to change. At the age of 30, was coming into a relationship which, to him, was "THE ONE!" There was no way he could be part of a "couple" if he was spending more than he was making - something had to change. Jim met with Wayne to discuss where he was (and why) and where he wanted to be. Jim was determined to "change my relationship with money forever," This is a New Year's resolution he shared with 69% of Canadians last year¹. However, unlike most others, Jim was able to stick with his promise to get control of his financial life. Jim would say 100% of his success dame down to working with a Wayne as his Advisor – and he was able to meet – and even surpass his goals.

Wayne asked Jim to make an honest list of where his money was going – every expense, impulse and habitual buy as well as his income. The time, for Jim, was well-spent. Once he understood his actual cash-flow position he could begin a budgeting process to help him get where he wanted to go. Wayne suggested a "50-30-20" rule – as a way to divide Jim's monthly after-tax income into three spending categories.

• 50% for needs.
• 30% for wants.
• 20% for savings or paying off debt & charity contributions.

Since Jim's fixed expenses exceeded 50% of his after-tax income, he had some tough decisions to make, including cutting down his more-than-once-a-day trips to his favourite coffee place where he would purchase sandwiches and beverages. This came easier to Jim than he thought it would…because he was SHOCKED by the amount of money he was ‘eating and drinking' each month. He also stopped buying things with his credit card. "I just didn't realize how quickly this all added up" says Jim. He could have moved into a smaller place - but in Jim's case that wasn't necessary, and neither was trading in his new car. Identifying and quantifying his wants helped him understand why he'd always been short on funds. "Once I understood that, I started bringing coffee from home and packing my own lunch daily."

The next 30% of his after-tax income was allocated for extras, such as entertainment subscriptions, dining out, gym memberships, gifts and personal shopping. Jim didn't need these to survive, but he did enjoy them.

The remaining 20% of his after-tax income went to paying off his credit cards and a little bit for savings. Once Jim had paid off his debt, he started putting the entire 20% into a diversified savings plan that he and Wayne set up for him. By the end of the year, he was debt-free, on his way to building his savings, and could even support a charity if he wanted to.

Saving isn't easy, but it's possible when you follow a simple plan that makes sense to you. While the 50-30-20 rule may not be ideal for everyone, it worked well for Jim. Eventually that life-changing relationship turned into a marriage, the purchase of a home, and Jim becoming a POSTER CHILD of success for the 50-30-20 plan.

Contact our office to set up a chat (in-person – COVID 19 restrictions followed) online through a secure ZOOM meeting, to get your new year started on the right foot. We're here to help you succeed!

Sources:

^1. The Globe and Mail: Set a New Year's resolution. When every day feels the same, having a goal to work towards will make a difference - https://www.theglobeandmail.com/life/article-set-a-new-years-resolution-when-every-day-feels-the-same-having-a-goal/