Money management is often a much overlooked issue until the very last moment. The trend in Pakistan is more reactive as opposed to proactive when it comes to saving money and budgeting for your own individual needs. Budgeting is not as simple as it seems since you often end up making tough decisions regarding how to spend and where to spend.
This can be overwhelming but there is a smart way of going about it. It is called the 50-20-30 Rule and it works by helping you track how much you spend and where you spend by categorizing your finances into three broad categories: personal spending, living essentials and savings. Read on below to find out how it works.
What is the 50-20-30 rule?
Quite simply put, it breaks up your finances in three categories. According to this rule, the following division should be followed:
50 percent of your income should be reserved for living essentials. These include things like rent, utilities, commuting, and groceries etc. These percentages reflect the upper limit so make sure you are aware of this.
20 percent of your income should be focused towards your financial objectives. This means that you should use this chunk to reduce your debt payments, savings, and investments etc. The good thing about this division is that you can change the percentages to suit your need. So if you have bigger financial aims, you can make this chunk slightly bigger.
30 percent of your funds should cater to your personal spending. This spending caters primarily to the things you want and are not an essential requirement such as vacations, dining out, movies, entertainment and shopping etc.
Why this works
The best thing about this technique is that it is very pragmatic and works wonders if you follow it religiously. Some of the reasons for its success can be attributed to the following things:
Since it works across income categories, the fun thing about this is that it is adjustable according to your needs. Not only that, but you can further break down the categories. For example, the 20% category can be further split in to 15 percent for retirement and 5 percent for a down payment on a future or new home. There is again, no restriction on the increasing and decreasing of the percentages. Select what suits your needs best.
The savings category gives you the chance to save up for major purchases along with becoming debt free. This method allows you to have a future focused approach. It is a proactive approach and lets you prepare for the rainy days well in advance.
The easiest way to get started with saving according to this is to do the following:
Determine your monthly take home pay. This is the first step that you need to figure out. This is the starting point which will help you to split your income in to the three categories defined above. This will give you an idea as to how much do you need to put in each category according to their respective percentages.
Next up, you need to examine your spending habits. Take a look at your statements (bank, debit card, and credit card) and track all the money you are spending. Do not leave out any details even the occasional coffee with friends needs to be accounted for. This will help you analyse which category is more flexible for you.
Lastly, you need to plan it out. If your expenses or savings don’t match up with the 50-20-30 rule, you need to come up with a plan to shift some of the percentages around until you find the perfect fit.
This is one of the saving techniques that would allow you to save up when thinking about either renting or buying real estate in Pakistan.
If you have used any saving techniques that have worked for you, let me know in the comments below or head on over to our forum for a bigger discussion.