Dear reader, concerned about not being broke anymore, from the middle of the month, we will propose you the zero based budgeting through the 50/30/20 rule. Don't worry, no furious math on the menu, just some good amount of reading.

PS: read slowly and take time to meditate.

 Let’s dig in !

The Zero based budgeting et la règle du 50/30/20, Qu’est-ce que c’est ?

The idea behind zero based budgeting is to exploit the potential of one's net income by allocating to each franc a precise destiny. Thus, one does not place oneself in a spending spree but rather in the most meticulous management, which generally requires a little good will. Don't worry, this is much less difficult than your analysis series .

So where does this 50/30/20 come from?

It is true that we do not know a creator strictly speaking for this rule, but the book All your Worth: The ultimate lifetime money plan by Elizabeth Warren (former professor of bankruptcy law at Harvard Law School and currently Democratic senator in the USA) has greatly contributed to its popularization.

Cette règle suggère la répartition du revenu net ( c’est-à-dire après avoir payé tous les impôts et taxes, nous aborderons tout ceci très prochainement 😊) sous la forme suivante :

  • 50% would be dedicated to needs (needs), 30% to wants (wants) and finally 20% to savings..

First of all, one should bear in mind certain positions taken by the writer:

It positions itself against indebtedness. It therefore goes without saying that this rule does not promote budgeting based on loans. However, it does not neglect certain less "harmful" debts (those that provide a good e.g. car loan).

High impact changes": suggests paying more attention to "big money outflows" (e.g. rent, insurance...) rather than "crumbs". Roughly speaking, we are interested in the money draining rate.

Elizabeth Warren
Let's break this rule down now!
Summary of the rule.

50% for your needs

It is recommended that 50% of net income be allocated to needs. It is therefore your duty to be honest with yourself and establish what is a need and what is not (frequent beers at Sat are not but they will not be neglected for all that).

The following could be considered as needs: rent, transportation (fuel for vehicle or SBB pass), food, debt payment (monthly fee) .

30% for your wants

A generous share is allocated to good living. After all, one must also enjoy and please oneself [while remaining reasonable], you might say! That's right!

Within this 30%, you will plan :

vos escapades, vos voyages, votre nouveau téléphone, vos soirées, votre abonnement  Netflix et bien d’autres.

However, we will have to remain consistent and try to stick to it. If it happens that your needs exceed 50%, it is wise to draw from your 30% wants.

 20% for your savings

Finally, we won't forget your piggy bank! We will have to fatten it nicely. The problems of the present (needs and wishes) having been solved, we will now consider the unforeseen of the future. It is recommended to think about saving in the following way:

  1. To ensure, a emergency fund :
    the ideal would be to reach the equivalent of 6 months of expenses.  This fund is intended to help you during periods of non-employment or struggle.
  2. Create a 3rd pillar account for retirement (more about this in the next article).
  3. Have savings for any unforeseen event (e.g. broken car, broken phone...)

Eventually a part of these savings is not destined to stay and snore in an account. Investment is a solution to fructify for the most courageous. Prudent people may opt to invest in a high-yield savings account.

In practice, how would this rule be applied?

Workflow

A few comments :

  • Determine goals and priorities and keep them in mind.

This step is very important and will give meaning to your budgeting system.

What do you want to accomplish ? When What do you want to accomplish How much do you need? etc

Eventually setting goals that are too optimistic will make your approach sterile.

  • Adjust your habits 

Therefore, you will have to be honest with yourself and give up on certain things.

The rule below that we will present is not scientifically proven but it has the advantage of giving a benchmark over time to better discipline oneself.

Dear impulsive consumers, the 30 day rule is there for you.

The idea is to give oneself 30 days to think when faced with an unplanned purchase. If at the end of the 30 days you are still thinking about it, then you could proceed with the purchase. Try it if you need to.

Etude de cas pour un étudiant

According to a study by the Swiss Federal Statistical Office in 2009 (it's quite old but we'll stick to it), the average net income of a Swiss student living alone would be 1870CHF. This same amount would be composed of 55% of parental contributions, 36% of paid employment and 16% of subsidies.

Let's take the example Machiavel, student respecting the above figures. It will be assumed that the latter works as a student assistant and lives in a shared flat (for a reasonable rent).

Let's see what our budgeting system does.

Let's say this represents the monthly expenses of Machiavel. We can see that it deviates a lot from the recommendations made by the 50/30/20 rule. Let's not cry disaster again! Of course, we don't have any information on the social difficulties, the desires, the personality of Machiavel but we will think about how to get closer to the "golden ratio":

Opt for a cheaper cafeteria at EPFL or bring your own food?

Look for a lower rent?

Opt pour un fitness moins cher ou bien aller au Centre sportif Dorigny ?

But in reality, is it possible to finance 36% of one's income with a student job without missing a semester?

A priori, the high cost of living in Switzerland could give this rule a hard time. Nevertheless, it will introduce you to the management of your personal finances. We therefore encourage you to try to apply this rule and see what adjustments are necessary.

Take home

Brought to you bY

Fadel Mamar Seydou

Bibliography

Bond, C. (2019). 5 Refreshing lessons from Elizabeth Warren’s Personal Finance Book. HUFFPOST. Retrieved from https://www.huffpost.com/entry/elizabeth-warren-book-all-your-worth-lessons_l_5cbe4b4ae4b0f7a84a73f5a9?guccounter=1

Maddox, C. (2019). What is the 30 Day Savings Rule? CHIME. Retrieved from https://www.chime.com/blog/what-is-the-30-day-savings-rule/

O’SHEA, B. (2020). Budgeting 101: How to Create a Budget. Nerdwallet. Retrieved from https://www.nerdwallet.com/blog/finance/how-to-build-a-budget/

SCHWAHN, L. (2019). How to Choose the Right Budget System. Nerdwallet. Retrieved from https://www.nerdwallet.com/article/finance/how-to-choose-the-right-budget-system

WHITESIDE, E. (2020). What Is the 50/20/30 Budget Rule? INVESTOPEDIA. Retrieved from https://www.chime.com/blog/what-is-the-30-day-savings-rule/

 

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