Budget, save and retire: 3 popular budgeting rules when saving for one's retirement

Compared to something like zero-based budgeting, which requires you to assign every single dirham a specific job, following a percentages budget rule can be easier. Read more.

When you budget by percentages, you’re just splitting your income into different categories. Then you assign each category a certain percentage of your income.

These percentage-based budget plans are a bit different from traditional budgeting, which allows you to manage your dirhams on your spending history and make modifications every month. A percentage-based budget plans for your present while also thinking about your future.

It divides your income into percentages that go toward the specific categories that you choose. For example, you can select four categories: disposable income, debt, expenses, and savings.

The percentage for each can vary. The main goal is to cover your bills and allow you to save some money at the same time. The most popular percentage-based budget is the 50-30-20 plan. But there is also the 60-30-10, 30-30-30-10 or 40-30-20-10 plans that have become increasingly popular. Let’s study them.

Budgeting percentage rule #1: 60-30-10 rule budget

The 60-30-10 rule budget advocates saving 60 per cent of your income, then dividing the rest between needs and wants.

Saving and investing 60 per cent of your budget could help you reach your dreams of retiring early and achieve financial independence.

Those are the two central goals of the FIRE (Financial Independence, Retire Early) movement, something 39 per cent of the general public say they’re interested in, as per recent surveys.

The 60-30-10 rule is mostly about saving for investment purposes.

With the 60-30-10 rule, investing and saving are the dominant categories. Most of your money is going to this category each month. If you’ve already added up your income, multiply that amount by 60 per cent or 0.60. This will tell you how much to save or invest.

So, say you take home Dh5,000 a month. Here’s what the math looks like: Dh5,000 x 0.60 = Dh3,000 In other words, you’re going to save or invest Dh3,000 of what you make. That’s Dh36,000 a year.

Budgeting percentage rule #2: 40-30-20-10 budgeting rule

Here’s another rule you may or may not have heard before – the 40-30-20-10 rule. Let’s break it down.

• Spend less than 40 per cent on loans

You should not be spending more than 40 per cent of your monthly income on loans.

Loans are long-term liabilities that weigh heavily on your finances and restrict the amount of free cash you have on hand for emergencies, so think twice if you’re intending to borrow beyond your means or commit to unrealistic monthly repayments.

• Less than 30 per cent should go into your expenses

According to this rule, ensure that your expenses do not exceed 30 per cent of your monthly income.

Experts recommend that one follows this guideline to maintain a consistent standard of living over the years and prevent any shopping sprees from going out of hand.

• Save at least 20 per cent for financial goals such as retirement

While saving money is a habit, it isn’t the goal in itself. The money you set aside needs to be channelled towards certain financial goals to be more meaningful.

To enjoy a more secure retirement, experts recommend working towards a target of saving at least 20 per cent of your income every month.

• Save at least 10 per cent for insurance for protection

Finally, ensure that you have some form of protection to fall back upon in times of need by saving at least 10 per cent of your monthly income for insurance.

Budgeting percentage rule #2: 30-30-30-10 budgeting rule

This plan is generally known for allowing you to save more and pay off more significant amounts of debt. The 30-30-30-10 plan is used as a reference for covering your house expenses, savings, paying off debt, and still allowing you to have a little fun.

This system lets you figure out how much you want to put in each category monthly, as well as the order in which you wish to allocate your cash. Let’s break it down.

This is how you’d divide your monthly income on the 30-30-30-10 budget plan:

• 30 per cent goes to the housing needs bucket: mortgage, rent, appliances, transportation, etc.

• 30 per cent should be designated to the “other expenses” bucket: utilities, groceries, clothing, phone, Internet, or school needs.

• 30 per cent to your financial goals bucket: paying off debt and saving for retirement or for an important project, investing, etc.

• 10 per cent for your “wants” bucket: amusement and leisure time like dining out, cable TV, going to the movies, etc.

Reality check: Is saving over half your income realistic? How does these budgets fare with others?

But is saving over half your income realistic? And how does the 60-30-10, the 40-30-20-10 or the 30-30-30-10 budgeting rules compare to other budgeting methods?

Following a budget where you save over half of your income isn’t necessarily right for everyone. But if you’re interested in how to apply this budget rule to your finances, here’s a closer look at how the budgets work and how they compares to other budgeting methods.

Compared to other budget rules that use percentages, the 60-30-10 budgeting rule is pretty ambitious when it comes to saving. Realistically, not everyone could afford to save that much of their pay each month.

Moreover, some statistics show that 63 per cent of the global population live on one month’s salary to the next. If you’re struggling financially, then a different budgeting method could work better.

But financial planners also reiterate that if you have the means to save 60 per cent of your income, the 60-30-10 budget rule could put you solidly on the path to building wealth.

When it comes to the 40-30-20-10 budgeting rule, often the question that arises is how many people do you know who only live on 30 per cent of their income? It can sound extremely conservative for some, while it is still being practiced among many.

You’d require a much better income just to be living an average lifestyle. But experts agree that’s kind of the point of this budgeting scheme.

However, a few also opine that not too many people could adhere to this type of drastic budgeting change from their own methods because they have come to expect a level of ‘luxury’ in their lives.

In comparison to the other budgeting rules, a key advantage of the 30-30-30-10 budget method is that it keeps you from going overboard with a portion designated to treating yourself.

However, before committing to the 30-30-30-10 budget, you need to take a look at your income and see if this will make sense for you. Remember that the rule is to spend only 30 per cent on housing and 30 per cent on other needs, and most of the rest goes to saving and a bit of spending.

This means that if your income is not very high, these percentages could be a struggle, depending on whether you live in an expensive area or not.

For example, if your salary is Dh30,000 per year, it may not make sense to spend only Dh750 per month on housing costs. So this budget works best with incomes that are a bit higher.

But so much of it is based on your specific situation. You may be able to make this budget work on a lower income if you’re disciplined or you live in a place with a low cost of living.