The 50-30-20 rule. #Financefriday

Some finance writers talk about the 50-30-20 rule, meaning that those on average earnings should spend 50% of their disposable income on essentials like housing, food, energy and communications. Then 30% on enjoying life; socialising, holidays and so on. The other 20% should go to savings and investments. They often call these groups, needs, wants and savings for the future.

Discretionary income

The income you have left after paying for all the essentials is discretionary income that you can spend on enjoying life. If you manage to save and invest 20% of your income then interest and dividends on those investments add to your discretionary income and allow you to enjoy life even more.

Social animals

Generally speaking, we enjoy life by socialising, we are social animals. We are the only animals who talk to one another and the only animals to read and write. Loneliness causes mental health problems and socialising is important to good health. A healthy diet is also important.

Cost of living crisis

We now have a cost of living crisis. Some people are spending 90% of their income on essentials, there is very little discretionary income and next winter energy costs will increase once again. The chancellor will give people £200 off their energy bills as a 5-year loan but for people on Universal Credit that won’t be enough. They won’t be able to afford healthy eating and they won’t afford socialising. Their health will suffer. Members of Parliament who represent them have suggested they should learn to cook 30p meals, get a better job or work longer hours. The latest inane suggestion is to go vegan and eat lentil curries or whatever vegans eat,

The cost of covid

To some extent, we are now paying a price for the pandemic with inflation. Quantitative easing put more liquidity into the economy and that drives inflation. The high oil price is also driving inflation. That is caused by cuts in production during the pandemic and to a lesser extent efforts to “leave it in the ground” to combat climate change. The big driver of high oil prices is now the war in Ukraine. The other driver of high inflation is the high price of natural gas which I see as a bigger problem than the high oil price. We really need to source more natural gas from the North Sea and move towards energy security.

Thrifty and frugal

We really need a thrifty and frugal campaign to help people manage. I occasionally see cookery programmes on TV and they aren’t teaching people how to cook cheap healthy meals. They are not teaching people how to be thrifty and frugal. We need more ideas to save money and television could also teach people how to save and invest. We need to destroy the idea that investing is only for the rich.

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