I was given this strategy some years ago by financial advisors brought in by my Pastor to speak to the congregation, when he taught us the principle of Tithing. Some of you may be familiar with that scripture that tells us the first 10% of any and all of our earnings go back to God. It wasn’t a suggestion, but a mandate. All my life I have heard people resist this principle. Usually it’s because many think tithes go to the preacher. They are mistaken. Tithes are designated solely for the upkeep of the church building itself. We worship in some of the most beautiful and luxurious buildings all over the world. Even when the church is a storefront, we tend to forget that someone has to pay for the lights, heat, water, maintenance and repairs of that building. God chose us to take care of those needs. In fact, if your place of worship has been established correctly and registered as a business with your states’ Secretary of State office and the IRS, the pastor can be arrested, fined and lose the church, if it is discovered s/he is using the tithes for personal gain. Today, most places of worship are run just like any other business.
Because many in the congregation were struggling financially, Pastor thought it beneficial to bring in financial advisors. It was during that week long event that one of the experts introduced to our congregation the 50/20/30 principle of finances. Every time the state of my financial health helps, rather than hinders me, I am thankful that my Pastor saw a need and cared enough to address it. Since using this strategy, my credit score has gone from the high 400 range to the 700 range and still climbing. Currently, I have some debt (most will have debt as long as we live and breathe) however, no one is knocking down the door or calling daily to get paid. I have no late payments; I have no judgements, my credit score is consistently rising and my debt to credit to income ratio is where it should be. Yes, there is a formula for this as well.
Your bank should have these tools available, as well as any credit and financial management platform. You do not have to pay for these services as many are offered free of charge. Once you locate and decide on one, enter all your information and it will tell you what you need to do to become financially sound. These tools will tell you when your credit card balances are too high and where they need to be. It will tell you that you have an excess of this type credit and not enough of another type. It will tell you why your credit score is low and what you need to do to bring it up. These type services are invaluable. In this day and age, with the technology that we have, there is no excuse for any of us to be lacking in knowledge concerning credit, debt and our financial health.
As students, we have even more of these tools available to us to ensure we are borrowing wisely and in a good position for repayment when the time comes. These tools are especially necessary if we are borrowing money for our education. There are a host of tools to make sure we are not living beyond our means. I remember one of the Deans speaking to us during orientation. He said something that has stuck with me. He said simply, “If you live like a lawyer while attending law school, you will live like a law student once you graduate and become a lawyer.” That spoke volumes to me. I get it. If you have ever heard the phrase, “S/he has champagne taste and beer money,” that sort of describes me. I love nice things; I have been this way my entire life. I’ve had to learn how to decorate my house with beautiful, exquisite items that were purchased at the dollar store. I am not beyond shopping at a second hand store for clothing and other items. When people come to my home they are in awe of the decorations and furnishings. When I step out of my door, one would think I am dressed by one of the finest designers of our time. No one has to know we shop at the local dollar store or consignment shop. I take care of my things, keep myself, the house and car neat and clean at all times. And I daydream about the day that I can purchase my first pair of “Red Bottom” shoes. Today is not that day and I keep things in perspective. With that said, I would like to share the 50|20|30 Rule with you.
50% of Our Income goes to Essentials. Essentials are pretty much the same across the board no matter who you are, where you live, work or play, or what your stage in life is at any given time. Essentials are just that, necessary, essential and must haves. It is essential to keep a roof over our head and eat every day. This principle becomes real clear, real fast when you have missed a couple of meals due to mismanaging your money. We all need transportation to get from point A to point B. Whether it’s a vehicle or public/private transportation, it costs money. With housing comes utilities, whether they are paid as a separate expense or rolled in with the rent. Keep in mind the categories within this percentage are adjustable. My housing in Illinois was substantially cheaper than my housing has been since relocating to the New England area.
20% of Our Income goes to Financial Obligations: This 20% should be directed toward those things we must do. No, we won’t die or become homeless if we eliminate this portion. However, this 20% secures our future and ensures we will be comfortable in our “Golden” years. When we are young, most of us don’t think about retirement. This is exactly the time we should be preparing. The earlier we start that savings the more interest that money earns, ensuring a larger payout when we need it. The cost of living increases every year. We will need a lot more money to live 20 years from now than we do today. In addition, remember when Mom told you to put something away for a rainy day? This is what she was talking about. A safety net for unexpected occurrences. This category comes after essentials, but before the last category. I like to call it the “get ahead” category.
Financial obligations are our savings contributions, such as:
- Emergency savings (the rainy day fund)
- Debt reduction.
Where 50% of our income or less is the goal for essentials, 20% or more should be the goal for financial obligations. This 20% should be used to pay down debt and make advances building towards our future. Retirement might not seem imperative now, but it will someday. Someday will quickly turn into today. Think about it. Do you really want to struggle financially in your senior years? Or do you want to have enough to live comfortable, not be a burden to someone else and be able to help your children and grandchildren if you so choose. I know many who were forced to put off retirement and are still working well into their 70’s because they did not plan/save, and are not able to live on retirement funds from social security or pension. It’s just not enough.
30% of Our Income is dedicated to Personal Choices; While it is the last category, don’t underestimate it because it is the category where we can make the most difference in our budget. These are voluntary obligations that enhance our lifestyle. While some financial experts consider this category completely discretionary, some of these so-called luxuries may be viewed as mandatory. This category has a larger percentage than our obligations just because more falls into it.
Personal lifestyle choice obligations include our:
1. Cell Phone
3. Internet Plans
4. Gym Memberships
5. Dining Out
Before attending law school, I categorized a cell phone and Internet as luxury items. Now, they are essential and fall in the 50% category. Gym membership may fall into that category as well, if you are struggling with weight issues. While it may be free to take a walk and work out at home, this is a personal decision that each of us will have to make based on our personal situation. While I don’t have a gym membership, I have had to come to terms with some weight issues and my health. One of the issues I faced was eating healthy. No matter what anyone tells you, it does cost more to eat healthy. When my grocery bill increased, I had to find ways to decrease costs in other areas. I rarely eat out and so that was not an issue for me. Some areas that you can consider and these I do myself.
Areas where we can save:
·Be mindful of purchasing clothing that has to be dry cleaned (even most of the clothes I wear to church or for a job interview can be machine washed. Follow the washing instructions and remove from the drier immediately and hang them up)
- ·Other than a salon manicure twice a year, I do my own nails (fingers and toes)
- ·Other than a professional cut twice a year for split ends, I do my own hair (of course you can go have hair and nails professionally done for special occasions or to treat yourself)
- ·Men should have manicure and pedicures as well and can follow the same schedule (Men, ladies don’t want a man with crusty and unkempt hands and feet. While men need to have their hair lined often, they still save because a lining is a small fraction of what ladies pay for a hair stylist.
- ·Our ancestors sometimes provided for their families by using a trade and barter system. I do this as well. Example: My Niece is a hair dresser; I will watch her children or help her clean and she does my hair at no cost. However, I still tip her.
- ·I cook and have my meals at home. If you are justify eating out because you think it is quicker and easier, don’t. Every quick meal you can get out, you can prepare at home and in a healthier way. Try preparing your meals at home for 30 days and see how much money you save. If it is not a significant amount, continue eating out.
- ·Do your due diligence and research before deciding on plans for Internet, Cable, Cellular Service, etc. When money is tight, I drop the cable package down to basic; I use my cellphone for talking and checking email. I don’t need the extras. A landline phone comes with the "bundled" cable package. Here are my criteria for purchasing a cell phone that costs in excess of $700. My house would be paid for (no mortgage), my car would be paid for (no monthly note), my retirement account is hefty and at the very least $100,000.00 would be in my savings account). Personally, even with all that, I would not pay $700 for a cell phone. The most I have ever paid for a cell phone is $100.00.
- I don't buy designer gym shoes. Why would I add to the designers bottom line when I am struggling to make ends meet week to week. I don't rent movies or own a DVD player.
- ·Car pool or take public transportation if it is convenient and will save money.
The point is, there are one hundred and one ways to cut costs, mitigate our daily expenses and save money. We just have to be willing and open to it. Everyone’s situation is different and each will have to figure out the best course of action to take. There are consequences for everything in life that we do. Situations and circumstances present unexpectantly all the time. However, we can somewhat prepare for the unknown and, the experience is less traumatic when we are prepared. We can live our life and have the things we need and want if we are careful with our finances and don’t live beyond our means. Another thing that has helped me. If I see that must have item; especially when the purchase is a significant one in terms of how much I will spend, I leave it in the store. Go home and sleep on it. The majority of the time I find it is not a must have and I can wait to purchase it. Another strategy is to save for it. It is an awesome feeling when I have been contemplating a purchase and I can walk in a store and pay cash for it and not worry about a bill not being paid or making payments with interest for the next six months or next six years. Something else I learned, never purchase fast food and other consumable items with a credit card unless you can pay the balance in full with the next payment. Think of it this way, do you really want to be paying interest in September on a fast food meal you purchased and ate in January? Of course if you don't have food and no other means of purchasing any, by all means use your credit card. A lot of this is common sense and not allowing our emotions to get the best of us. Here’s the thing, I love shiny new things with bells and whistles, as most do. I love diamonds and gold. But I vow not to allow those things to ruin my financial health and future, and that’s the difference. If I am smart, plan for it and exercise restraint now, I will eventually have all that I want.
When we are young, there is a period of a lot of trial and error. However, this time can also be when you establish good habits that last a lifetime. The 50/20/30 rule works no matter what your income is and that’s what is good about this method. Since it's percentage-based, the same proportions can, and do apply, whether you're earning entry-level pay or have a six figure income. This rule gives us a framework to work within. Once you review your income and expenses, and determine what's essential and what's not, then you can create a budget that makes the most sense for you. This principle will work today and it will work 20 years from now, and that’s the beauty of it.