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Enjoy life and save for the future by splitting income using the '50/15/5 rule'

14 October 2019 10:30 AM
You only live once — personal finance guru Warren Ingram on divvying up your income if you're not the budgeting type.

The Money Show’s Bruce Whitfield asked Warren Ingram, a financial advisor at Galileo Capital, how to divvy up his monthly income so that he can enjoy life, save for the future and not worry about money every month.

Ingram suggests following the “50/15/5 rule”, developed by Fidelity in the USA.

It’s great for those who don’t like to budget every month.

Image courtesy of Maitree Rimthong (https://www.pexels.com/@maitree-rimthong-444156)

15: Save 15% of your pre-tax salary for retirement

Invest the 15% in a company pension plan or your own retirement annuity (RA).

If you are not saving this amount now; then arrange an annual increase in your savings.

For example, apply to increase your RA contribution by 10% next year.

5: Save 5% of take-home pay for short term savings

You should have an emergency fund that can cover three to six months’ expenses.

Ingram warns that this fund should only be for when disaster strikes, not unplanned expenses that are necessary but not an emergency (e.g. replacing a car tyre, fixing your smartphone screen, extra medical costs, maintenance of your car, etc.)

50: Spend 50% of take-home pay on essential expenses

  • Housing — mortgage, rent, property tax, utilities (electricity, etc.), homeowners’ insurance, and rates

  • Food — groceries only; not restaurant meals

  • Health care — medical aid and out-of-pocket expenses (e.g. prescriptions, co-payments, etc.)

  • Transportation — commuter fares or car payments, petrol, car insurance, parking, tolls, maintenance

  • Childcare — day care, education

  • Debt payments and other obligations — credit card payments, student loan payments, child support and life insurance

The rest

The rest of your total income can go towards entertainment, clothes, luxuries, holidays, etc.

Want to retire before you’re 65?

Saving and investing 15% of your pre-tax salary for 40 years should allow you to retire when you’re 65 years old.

If that’s too old for you; you’ll need to cut from “the rest” to increase your retirement savings.

For more detail, listen to the interview in the audio below.

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14 October 2019 10:30 AM

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