Musing 6: SI Balance in Real Life

MUSING 6: SPENDING INVESTING BALANCE IN REAL LIFE

·        Yesterday we learnt the concept of 50:30:20 budget and resultant spending investing (SI) balance. Let us now see it in real life with our protagonist Anshreya who has got a brand new job at Bengaluru with a take home pay of Rs 50,000.

Anshreya must not spend more than Rs 25,000 on his needs (50% of take home pay). So, he must manage his house rent, basic clothing and food needs and other utilities like mobile/internet bill, fuel for bike (if he has) or other transportation expenditure, electricity/water bills etc. out of this amount.

The biggest chunk is likely to be for house rent. As a rule of thumb, not more than 50% of needs budget should go towards house rent-Rs 12,500 in this case. He may have to make compromise regarding location of the house, if a good house, close to his place of work is not available within his budget of Rs 12,500. Remember, other expenditure connected with house like water, electricity charges etc. must also be catered for within this amount. A good idea would be to share the apartment with friends or go in as a PG. DON’T even think of buying a house at this stage-we will tackle this issue later.

Now, Anshreya has Rs 12,500 left to take care of his balance of needs, the most important of which is food. As per the job schedule, his lunch is going to be in his office only, for which normally organizations provide very reasonably priced menu. He must avail of the same. For his breakfast and dinner, he needs to tie up either with his PG or keep a maid who prepares his breakfast and dinner. He can’t afford a dinner in restaurant every day-his health and pocket included.

Transportation needs could be best tackled with public transport like Metro or bus. If not convenient, an office shared cab would be a good option. Overtime, he can plan to buy a bike/used car (yes, a two year old USED car, and not new) to save on his transportation cost. Remember, he needs to save money to give at least 20% of down payment towards bike/car cost. The balance could be paid in form of EMI which have to come out of his Needs budget. This automatically puts a cap on the cost of the bike. Absolutely no Hayabusa or Harley Davidson in the initial years of earning. How does he save for the 20% down payment? By setting aside 5% of his take home pay (out of 20% savings bucket?) towards this goal. On no account more than 5% of take home pay be earmarked for this and balance 15% of pay must be saved.

Clothing needs require some upfront expenditure as Anshreya may require formal clothing for office. It is better to find out the requirements before joining and buy the clothing from his home town in conjunction with his parents. All other  clothing needs, once he joins, have to be met out of his overall 30% wants bucket so he needs to be selective and prioritize accordingly.

Saving bucket (20%) is sacred and in this case, Rs 10,000 per month must be invested to create a Breathing Fund. We will cover the details in following musing. If buying a bike is a priority, Rs 2,500 (5% of take home pay) must be set aside for creating a corpus for 20% payment of bike, as discussed earlier.

Now we reach the Wants bucket (30%) for which Anshreya has Rs 15,000 for the month. This he can spend in any way he wants-movies, outings, sneakers, books, pizza, new mobile-the list is endless. One probable way could be to divide this amount into weekly sums-Rs 3,500-Rs 4,000 in this case. Normally, he will get free time in the weekends where he can spend this weekly sum. Weekly budgeting will ensure that he doesn’t dip into his savings/needs bucket for his wants. And absolutely, no spending on wants from next month budget (credit cards will tempt him to do that). Once the weekly/monthly wants money is gone, it’s gone.

This will also be the life stage when the loan sharks in form of credit card, bike, car  offers,  will start chasing Anshreya. Beware of them as he has to methodically increase his net worth and create a balanced life for himself without being straddled with costly and pernicious EMI. We will tackle the issue of credit cards in a subsequent musing.

The 50:30:20 or SI balance must be checked regularly-may be twice a year and prior to major changes in life like marriage, childbirth or promotion etc. The best part about SI balance is that one doesn’t have to fret about personal finances once this balance is achieved. Let me give some thumb rule percentages[1].

Needs bucket (50% bucket) - Under 35%: good show; 35-50%: in balance; 50-65%: danger Zone; more than 65%: disaster Zone.

Savings bucket (30% bucket) – more than 20%: super big saver; 12-20%: strong saver; 6-12%: solid saver; less than 6%: pull up your socks or you are staring at a poor retirement.

Wants bucket (20% bucket) – 20-30%: wants in balance; less than 20%: all work and no play; more than 30%: splurger-beware.

Key Chapter Takeaways

As soon as you start earning or anytime in life look for and calculate your SI Balance. If not within 50:30:20, start by cutting down on wants followed by Needs. Savings must remain 20% without fail.

·        One will not strike a perfect 50:30:20 budget right in the beginning. Still a 55:30:15 budget is better than a 60:40:0 one. Always balance your needs bucket first-towards 50%, before tackling other buckets. Little iteration may be required before arriving at thumb rule percentages depending on individual to individual.

·        Relook at SI balance every six months or prior to a major life change like marriage and childbirth or decision to buy a house or car etc.

·        If you are saddled with a credit card debt, personal loan or any other debt except home, education loan and car, the minimum monthly payment will form part of Needs bucket but additional payments to clear off the debt faster will have to come out of Savings bucket (not more than 5-10% of take home pay).

·        Wants must contain aspirations of both partners after marriage.

     I sign off for this weekend with the hope that we are beginning to get a hang of creating financial balance in our life-the sole aim of these musings. We meet again next weekend. Thanks for following.

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[1] Warren Elizabeth and Tyagi Amelia Warren, All your Worth.