Hello hello,
Are you struggling to make ends meet?
You don’t really have an overview of your various expenses?
Are you managing your income well, but would like to optimize your spending?
Then you’ve come to the right place.
In this new article, I’m going to tell you about a method for better managing your budget: the 50/30/20 method. As an added bonus, I’ll explain how to apply this method to your profile, so you can save better and get richer!
3-2-1, here we go!
Back to BASICS
As you know, to get rich, you have to invest. But to invest more, you have only two options:
- Seek to earn more, which means asking for a raise, changing jobs or holding down several jobs. The problem is that our time isn’t infinite… Our days are only 24 hours long, which means you can’t hold X number of jobs.
- Learn to manage your expenses better, spend better, and allocate part of your salary to investment.
It’s this 2nd option that we’re going to look at together today.
Because you might think that to be rich, you have to come from a wealthy family and be born into wealth. Well, that certainly helps. But in my opinion, to become rich, all you need is a good education and a good relationship with money.
You need to learn to spend better.
And then, MAGIC! There’s a great method that lets you combine pleasure and savings to ensure a bright financial future. THE FAMOUS 50/30/20 RULE.
A little history
The 50/30/20 method originated in the book “All Your Worth: The Ultimate Lifetime Money Plan”, written by US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi.
Their conclusion, after more than twenty years of research, is simple. To manage your finances well, all you have to do is set up a budget that meets your needs, desires and goals.
How does this work in practice?
Well, quite simply, you’ll need to divide your after-tax salary into 3 parts.
As the net salary you receive each month in your bank account contains a part that you’ll have to pay to the tax authorities, you have to deduct it.
In Switzerland, we say that the average person pays 2 annual salaries in taxes, i.e. 1/6.
So you need to take the net salary you receive in your bank account, for example CHF 5,000, and deduct 1/6, so if you do the math together, CHF 5,000/6= CHF 833.3.
What I can recommend is that you transfer the part you owe to the tax authorities directly to a savings project, as proposed by the Yuh application. But it could also be the savings account in which you’ve set up your security fund. It’s up to you 🙂
That way, as soon as you get your tax instalment request for the following year, you just transfer the money and that’s it.
This is something I personally do, and recommend you do, especially to avoid reminder fees for unpaid bills.
So now we have our after-tax salary of CHF 5,000 – CHF 833.30, i.e. CHF 4,166.60.
I’ll round it off to CHF 4,100 to make it easier to explain.
Now we can divide our salary into 3 parts.
The first part should represent 50% of our net salary after tax, in the example 4,100/2 = CHF 2,050.
This part will be used for essential expenses such as rent, food, electricity, transport costs, health/liability/car insurance.
If you have children, you can also include the cost of school supplies and childcare if you have young children.
You can also include expenses that affect us all, such as telephone and wifi subscriptions, which are hard to do without these days.
In this 50%, you’ll also have to include medical expenses such as annual check-ups with your GP or the painkillers you inevitably buy when you GET the flu.
So I agree with you, it’s not possible to plan for all medical expenses. I wasn’t expecting it myself when I received CHF 10,000 worth of bills for medical operations in 4 months, which, by the way, were unplanned medical operations.
But fortunately, I had my security fund which I was able to dip into to pay my bills directly.
The second part should represent 30% of your net salary after tax, in our example CHF 4,100 x 0.3 = CHF 1,230.
According to the Warrens’ recommendations, this budget should be allocated to all expenses that will give us pleasure, without being essential to our daily lives.
These include eating out, going to the cinema, shopping, shopping for non-vital items such as aperitifs, potato chips, cookies, ice creams…Ice creams, non-vital?! Did I really say that? (Yes, I’m a big fan of ice cream ^^).
Fitness memberships, hairdressing, sports club or dance school fees, summer festivals, short hotel stays for extended weekends, savings for a 2-week trip planned for the summer, Netflix or Spotify premium subscriptions, etc.
So you might ask… why budget for fun? The answer is very simple. If you’re always restricting yourself, you’ll go crazy, end up abandoning your plans, and above all end up spending it all, to make up for the moments of restriction.
You’ll end up eating double the amount of pastries, for example, to compensate, and your efforts will have been for nothing.
Finally, the remaining 20%, in our example CHF 4,100 x 0.2 = CHF 820, should be dedicated to building wealth and retirement.
I’d like to take 1 minute to remind you that before investing, you need to create this security fund, so if you haven’t already done so, it would be a good idea to allocate this entire 20% to the creation of this 3-6 salary security fund, which will come in handy in the event of a hard blow. Sorry, Mamie Elodie had to remind you 😉
And if you already have this security fund, then fire GO, you can invest this 20% in the stock market, real estate, precious metals, alternative investments, or in projects that allow you to increase your wealth.
Let’s get down to business
If you’d like to try out this method and take your investment to the next level, then take your net monthly income and transfer 1/6 of it to a savings account, so you can pay your taxes in one go when you receive your tax ruling.
Then calculate what the 50%, 30% and 20% of your net salary – its 1/6 – does respectively.
Then take a sheet of paper and list all your monthly expenses.
You can use your bank statements to make sure you don’t forget any expenses.
Classify them as vital, pleasure or investment expenses.
You can also use my ultimate Excel budgeting tool to budget like never before.
Finally, make sure that the total for each category doesn’t exceed the amounts you actually have available.
This way, you’ll be able to easily identify overspending and overspending that can be reduced, and you’ll be able to put things right, so that hard times at the end of the month are far behind you, and early retirement is just around the corner!
If you have any doubts about the categories, write me a comment under the article and I’ll tell you in which part of the budget you should count them.
Because yes, this method has its limits, and some expenses that may seem vital are really just pleasure expenses, and it’s not always easy to categorize.
But believe me, a well-managed budget makes all the difference.
Of course, you need to adapt this model to your profile, in the sense that if you have a high salary of CHF 8,000, you’re not going to put CHF 4,000 into vital needs.
In this case, you’ll be able to put more money into the investment part of the model, and thus make your money grow.
Now you know how to set up the 50/30/20 budget to better control your money and build your wealth without restricting yourself.
Now, to your investments!
