Have you ever heard of the 50-30-20 rule? This is what experts recommend you base yourself on in order to increase your disposable income little by little. The method is principally based on allocating 50% of your income to fixed costs, 30% to leisure and 20% to savings.  

TOPIC OF THE MONTH

1 June 2021

Share

But is it as easy as it sounds? The most important thing is to be organised and to know why and what you are saving for at each point, and to always add a little bit of common sense to what you are doing.

 You need to be aware that rigidly following this rule can be complicated; there are more and less expensive months, but setting yourself an annual budget may help you to have greater control of expenditure and earnings, according to Natalia de Santiago, an engineer by training and a financier by vocation, in her book Invest in yourself. The budget is a tool that allows you to think ahead to what is going to happen over time, giving you a wider margin for manoeuvre if anything unforeseen should occur.

5 steps to managing the household finances

  • Cover your monthly costs: for your finances to go well, the principal thing is that they reach the end of the month every month of the year. How? By making sure that your expenses never surpass your income and always being aware that there will be months when it will go over, but you should compensate for this from each of the remaining months. This is why it is very important to have an annual budget.
  • The emergency buffer: Experts recommend that your ability to react to times of crisis should be around 3 times the value of your net salary, although ideally it should be 6 months. In other words, multiply your salary by 3 and this will be the minimum amount that would be good to have in savings for whatever may happen. This is complicated, and cannot be done in a day, so a good way to start growing this emergency buffer is, for example, by transferring a monthly amount to a savings account. Also remember that this money needs to be in a quick access account so that, if it is required, you can access it as quickly as possible.
  • Save for retirement: yes, that golden time that we all view as being so far away. Whether you are 25 or 35, it is important to start putting some money away, unhurriedly but consistently, for your retirement. And keep in mind that the more you earn now, the more you will need to put by for your future, as your pension may mean a substantial reduction in your monthly earnings.
  • Medium-term objectives: once you have your annual budget, your emergency buffer and retirement savings in place, you can set yourself other objectives: a trip, a car, your dream wedding…
  • Living comfortably: yes, and only if you have covered all the above points, you can devote the rest of your money to living comfortably or to investing, ensuring your children’s future, buying yourself a yacht or retiring at 40. It may seem impossible, but it can be achieved; it is a question of determination, organisation and planning.