Flipping the budget script
INDIVIDUALS starting out in their personal finance journey often start with a budget, seeking established budgeting rules and guidelines as their compass. Yet, while such rules can provide a helpful framework, financial educators are now casting a critical eye on one of the most prominent guidelines: the 50/30/20 budget rule.
Financial educator Michelle Sinclair-Doyley, who has a wealth of experience as a financial advisor, is challenging the status quo with a radical notion. Instead of dividing up your income into fixed categories, she suggests something entirely different: prioritise your goals first and then pay your bills.
“Most people would look at it and say she is crazy, but yes, that is what would give you the greatest opportunity to actually achieve your goals, especially if you are not someone who is highly paid,” said Sinclair-Doyley, manager, client financial education and partnership at JMMB, while speaking with the Jamaica Observer.
She explained that traditionally many people budget by calculating how much their utilities and bills would add up to their needs, and whatever is left is saved and goes to the goal. But she says that way will leave many never accomplishing their goals.
“If we decide that the goal gets paid first and everything else comes after, and you realise you are running out of money, it sends a trigger to the brain that says, ‘Oh, my goodness, I have to earn more.’ But if you do it the other way around, where you pay everybody first, you more than likely will never get the trigger in your brain to meet your goals,” warned Sinclair-Doyley.
This unconventional approach flips the script on conventional budgeting. By setting your goals as the top financial priority, she explains that individuals will ensure that their resources are directly aligned with their dreams and ambitions. Diving deep into discussions with Sunday Finance, Sinclair-Doyley broke down how the 50/30/20 budget rule, a widely known guideline and a go-to approach for financial planning, can create an imbalance in your financial priorities. The budget rule allots 50 per cent of income for necessities, 30 per cent for discretionary spending, and 20 per cent for savings.
“It says to you, you can spend 50 per cent on your expenses, so what you do is, you say, Okay, well, I can really afford to buy that car because it is 50 per cent of my take-home that I’m going to be spending on the car loan for argument sake,” she said.
Sinclair-Doyley contends that this rule may lead individuals to increase their expenses to match their salaries, and saving only 20 per cent of their income can create a false sense of security. The rule suggests that 50 per cent is allocated to expenses, leading individuals to justify major purchases and increased spending based on this benchmark. Sinclair-Doyley emphasises that the percentage-based approach may not always align with personal financial goals and aspirations. Instead, Sinclair-Doyley recommends a shift in perspective. She advocates assessing one’s specific financial goals, their associated costs, and the timeline for achieving them. By budgeting for their goals first and allocating resources accordingly, one can ensure that their financial resources are aligned with their aspirations.
“If you look at the real estate market, it has shot up in terms of price, so if you look at your salary and you earn a $100,000 salary and I pick $20,000, which is 20 per cent, then you would have ignored the fact that a two-bedroom house in Portmore is going for $27,000,000, and in order for you to afford the down payment on that property, you’re going to therefore need to save far more than $20,000 a month,” she said.
She suggests that ideally, when evaluating goals, people should be looking at what the goal will cost, when they want to achieve that goal, and calculating how much they would need to save each month in order to achieve that goal within the timeline set.
“If that goal is important to you, it naturally sets you up to start spending and investing differently because you now start to think of your goal first,” she revealed. “If you find that it still fits, then you’re going to expand your mind some more, and you’re going to earn more,” she added.
She suggests that while it’s challenging to cut down on living expenses, the focus should be on increasing earnings to match dreams or, alternatively, revising the goals to align with current financial realities. To implement this strategy effectively, Sinclair-Doyley recommends consulting a professional financial advisor who can formulate a personalised budget tailored specifically to your financial situation and goals.
She also encourages people to resist the temptation to increase their expenses when they receive salary raises, instead creating a standing order to direct extra funds towards their financial goals. A standing order is a financial arrangement that allows an individual to set up automatic, regular payments from their bank account to another account or organisation. It’s an option she says exists to prevent people from spending extra monthly and experiencing a phenomenon described as “income-induced inflation”.
While Sinclair-Doyley tactics on budgeting might not appeal to everyone, budget coach and founder of Budget Leaf, Keron Clarke, who agrees that the ‘one-size-fits-all’ approach falls short for many, says it’s important for beginners to have somewhere to start.
“The 50-needs, 30-wants, and 20-savings budget rule is simply a budgeting guide. Over time, the budgeter can shift the numbers around to something that fits them, like 40 per cent needs, 40 per cent wants, 30 per cent savings, or 30 per cent needs, 30 per cent wants, and 40 per cent savings, for example,” Clarke shared with the Sunday Finance. “Fifty/ 30/ 20 is a starting point and should be modified with time,” she added.