(An Extract from Living Loud on a Budget: Authentic Financial Living – Chapter 6)

Budget percentage allocations are important in meeting your financial goals, regardless of whether you are a basic budgeter or at the advanced level. Additionally, they should be customised per an individual’s goals and their age.

The 50/30/20 rule was made popular by US Senator Elizabeth Warren. The theory suggests that no more than 50% of your income should go towards living expenses, 30% towards wants and 20% towards saving. As a starting point, this is a simplistic way to allocate your income to ensure you are working towards your goals and, most importantly, that you are contributing towards your savings.

Personalised budget allocation

To create a financial plan that works for your individual needs, you will be required to make accommodations and some deviations from the standard rules. Following the usual path might get you there, but if you want to go beyond the usual path, then you need to divert from the usual ways. By following the standard path between living expenses and wants, 80% of your income is being spent on expenses that do not produce a return. That is based on the premise that the living expenses do not include any amounts being allocated to a real estate asset, or that the portion is minimal.

For a young person who has started working and is at a stage where they want to enjoy a bit of life before the real financial obligations come, if that individual does not have excessive student loans which need attention, the standard allocation will serve them. As a person gets older with a family and other obligations and goals, only putting aside 20% will not be enough for savings and investing, thanks to the current world economy and the uncertainty that appears every ten- to-twelve years, due to extraordinary events.

Budget allocations for career advancement

For persons who are desirous of building a career that involves various levels of development to reach the pinnacle, they will need to allocate a portion of income to their personal development from an early stage (as discussed further in a later chapter). The onus is on you to ensure you allocate the resources to take your career to the next level. Individuals at the foundation level of their career should consider setting aside up to 5% for this purpose. Once spent strategically, this investment will result in an increase in that person’s earning capacity. This allocation category can also be used as seeding funds to create a business or a new stream of income.

The savings allocations can be customised based on what an individual is trying to achieve. An upcoming section entitled Saving Money With Zeros and Commas highlights how one can reach their goals, whether they are retiring early or increasing their overall wealth by funding their savings allocations.

With those adjustments, the Fun Category allocation will be reduced, and at some point along the financial journey, the reality is, unless you have inherited unlimited amounts of cash, the priorities of building a successful financial life will take precedence over fun. There is a season for everything under the sun. If you stay focused and make the necessary sacrifices during the building season, the play season will be more rewarding.

Summary

Budgeting should not be seen as a one-size-fits-all or static document. Rather, it should be adapted as many times as life demands. As an individual gets older and embarks on various life adventures, allocations will be adjusted, categories will be added and removed, and this is expected. For example, as an individual increases their income, it would be expected that the 50% Living Expenses category will start to decrease, shifting to an allocation with more disposable income.

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