We recommend using the 50/30/20 rule as an easy-to-use budgeting approach to help you get there.
First things first: It's not actually a rule that must never be broken. Instead, it's a guideline — or, if you're dealing with debt, a general direction. With this approach, you're trying to allocate your take-home pay into three buckets:
Fifty per cent goes to needs. This includes bills, groceries, transportation, housing, minimum debt payments, work clothes, and other essential items.
Thirty per cent goes to wants. Eating out, happy hour, shopping, Netflix accounts, or trips to Bali … fun's important.
Twenty per cent goes to Future You. Three things in this bucket: debt payments above the minimums, saving, and investing.
Step one is pay down debt. For any debt with a repayment interest rate above 5 per cent, eg, credit card debt, personal loans, it's going to cost a lot in interest to hang on to that balance.
Pay the minimums across all your accounts and put any extra cash you can find in your budget toward the balance with the highest interest rate. This technique will help you pay the least amount of interest possible.
Next up is Emergency Fund. Sometimes it rains, and sometimes it pours. And sometimes it totally floods.
We recommend saving three to six months' worth of take-home pay, depending on how stable your income is. For example, if you're a single freelancer, you might want to do six months' worth.
That will give you more of a cushion to fall back on since your income might be irregular. On the other end of the spectrum, if you've been working fulltime for years and have another member of your household who helps pay the bills, then three months' worth might be enough.
Either way, keep your emergency fund in cash (ie. a savings or checking account, not dollars under the mattress) so that you can get to it when you need it.
Get on track for retirement or first home
If you're still establishing a solid financial base, keep doing what you're doing. But no matter what, try to take full advantage of KiwiSaver.
The Government will contribute 50 cents for each dollar you contribute in a financial year, up to a maximum of $521.43, and, if employed, your employer should contribute at least 3 per cent of your gross wages. That's effectively free money.
Once you've got debt and your emergency fund checked off the list, you can turn your attention more fully to your retirement or get ready for home ownership (if that's your goal). The sooner you can, the better — a dollar invested "today" can be worth more than a dollar down the line (The power of Compound Interest).
If possible, consider increasing your KiwiSaver contributions to 4 per cent or 8 per cent of your gross salary (further options of 6 per cent and 10 oer cent likely to be introduced in 2019) to stay on track to achieve your goals.
Let your priorities guide the way.
Debt, savings, retirement, home ownership, kids … you might be juggling a lot of priorities. But those aren't the only goals that investing could potentially help you check off.
Perhaps you always dreamed of starting your own business or taking a big 40th birthday trip to Rome. Or maybe you just want to build wealth. Slot those goals in with your other priorities and start carefully investing as much as you can to make them happen.
*Geoff Wilson is a Registered Financial Adviser and KiwiSaver Adviser at Stewart Group – a Hawke's Bay-based independent financial advisory firm based in Hastings. Stewart Group provides Wealth Management, Risk Insurance and KiwiSaver services. We work with individuals, families, and businesses in New Zealand who are committed to pursuing financial planning and wellbeing. Our clients understand the value of independent, goal oriented and objective financial advice that is free of conflicts. If that sounds like you, we would love to hear from you.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.
