The development and evolution of money is one of mankind’s greatest inventions!
Whether it’s a farmer, train driver, banker, politician, or something else, the value of work can be seamlessly converted into cash that is instantly recognisable and transferable.
Ultimately, money is a means to an end. And for most people, that falls into one of three categories; needs, wants and savings.
For most people, their current account is their financial gatekeeper. A simple click on their banking app will tell them how well they are doing, if they are in the red or still have some cash on hand! And for most people, this is all the information they require.
Budgeting apps, which often promise some sort of financial nirvana have been nothing of the sort. In fact, consumers globally have come to view budgeting apps as a little too nit-picky, too demanding and too constraining and restricting of personal freedoms. Who really wants that? After all, people work hard to earn money, the last thing they really want is another ‘app’ telling them how they should live their lives.
The original purpose of money was to create freedom. Freedom of movement and freedom of choice. Budgeting is the opposite of that. The word budget is in itself is a formula for restraint. It represents categories of spending. Of when and where to spend. Of how to spend…and when not to spend too!
Of course, this is not to suggest that budgeting and budgeting apps don’t have value, they do! It’s just that the financial pain they carry for so many people means their wide adoption remains elusive.
For now, in terms of personal money management, there is a relatively simple approach that I always suggest to those looking to make the best use of their money. It’s called the 50:30:20 rule and it applies a very straightforward use of money based on needs, wants and savings.
Under the 50:30:20 approach, half of the household income is used to pay for essentials (needs) such as food, shelter, transport and so forth.
A little under one-third (30%) is used to add a little comfort to life (wants), these are the little moments of enjoyments, like a meal, a holiday and so on! The trick with needs is they can sometimes double up as wants! For example, someone needs a car for transport. This is a need that can double as a want if the person opts for a higher specification model.
And finally, there is the 20%. This is where savings come in. The very basic assumption here is that everybody should save. Life emergencies can pop up and this is where saving prove valuable.
The trick with the 50:30:20 rule is that it is applied liberally. Rather than a rigid adherence to the figures, a looser approach is encouraged as life needs allow. So, where personal finances are limited, more money may have to be redirected to paying for life needs and less may be available for paying for pleasures (wants) and saving. But equally, if circumstances change and one can save extra, or more than 20%, they should do so. Over time, this approach to money should even out.
Finally, a personal finance approach that is too rigid will cause financial stress. Personal financial data is important, but it can also become a prison that is not accommodative of changing life circumstances. In life, there is nothing more permanent than change and how one relates with money is key to their long-term financial wellbeing. A flexible approach within flexible limits offers many, many benefits.
Frank Conway is Founder of MoneyWhizz, the financial literacy initiative.