We often see these graphs that tell us quite precisely what proportion of our income should be devoted to savings and what proportion to spending on pleasure. Are these rules useful, universal or rather anxiety-inducing?
“Having scales allows you to see in a few seconds if you meet certain criteria,” says Béatrice Bernard-Poulain, author of the book It costs even more, being an adult!.
The 50-30-20 rule is very common, probably because it is super simple.
Income should be divided into three pieces of the pie: the largest (50%) is reserved for basic needs, rent (or mortgage), groceries, checking accounts, insurance and transportation. Savings counts for 20% – which includes building an emergency fund and paying off debts, if any. Finally, there is a generous 30% that is there for other non-essential expenses, ranging from vacations to dining out for dinner.
People who have a good handle on their finances may find these scales infantilizing and childish, but for someone who always puts off budgeting, it can be a way to break the ice.
“When you want to make your budget for the first time, when you have never taken the time to look at your finances, you are often overwhelmed,” continues the author. There are so many things we think we have to do. Then, we compare ourselves to our neighbors and we believe that everyone else has understood many things that we have not yet understood. »
According to her, such an exercise inevitably triggers reflection on one’s finances and budget management, which cannot be bad.
“It can become a positive motivation,” continues Béatrice Bernard-Poulain. On the other hand, if we see that it is stress more than anything else, we must refer to our figures, to our reality. »
Angela Iermieri, a financial planner at Desjardins Wealth Management, also reminds us that our budgets must be realistic. “If we go with standards like 50-30-20 and it doesn’t work for us, we’re going to lose motivation. Studies show that once people aren’t motivated, they stop, put it aside, like anything else we try to do all of a sudden.”
Bottom line: Manage your finances the way that works best for you. If your brother is a stock market specialist, do him a lot of good. If you have to start with a bar graph to sort it all out, it’s not a problem, it can even be very useful to see your expenses in a very graphic way.
“They say you have to invest in ETFs, you have to have the lowest interest rate on debt. All of this is true and super important, but when we talk with stakeholders from community organizations and people in the field, we realize that the basis remains the budget,” specifies from the outset the director of the Education Laboratory financial advisor of HEC Montreal, Philippe D’Astous, who points out that half of Canadians do not do so.
He says whether you have debt or not, whether you’re 32 or 67, understanding where your spending goes is a good practice.
All the applications available (and there are many, especially those from financial institutions) make it easy to segment expenses.
Philippe D’Astous advises taking a look at the budget planner tool from the Financial Consumer Agency of Canada. It creates a portrait of our expenses by category and allows us to compare our situation to the “average Canadian” with a profile similar to ours.
“We don’t want to say that the average Canadian has the right answer,” warns Philippe D’Astous, “but, yes, we like to compare. »
And if we’re concerned about these differences, there’s a good chance they’ll become food for thought.
“Not everyone has the same ideas, because we don’t all have the same projects and the same objectives,” Philippe D’Astous wants to point out. Someone who is 25 years old and wants to become a homeowner within 10 years will have a much larger savings portion than someone else. »
Same thing for those who aim to retire at age 45 and who put a large part of their income into savings.
“Of course there are ground rules,” he says. It’s okay to have references, but you have to understand that there are special situations. »
In this buffet of advice and methods, Philippe d’Astous warns that if there is one thing to avoid, it is the moralizing discourse which imposes a universal rule and makes us want to judge our neighbor.
If you can’t put everything into boxes, it’s still good to have references in personal finance. An example, the maximum to devote to your mortgage loan. “When someone wants to buy a house, there are maximums that you have to respect,” says financial planner Angela Iermieri.
Housing should not exceed 32%, 34% or 36% of gross income, depending on the ratios used.
Angela Iermieri also believes that financial planning and saving are very personal actions. “But you can go with a minimum: start with 10% of net income, if you are able to reach that. […] On the other hand, if someone has a short or medium term objective or project, they will have to work hard. »
The same logic applies to the emergency fund: we often estimate this reserve at the equivalent of three to six months of expenses. “Let’s start with the three months,” says Angela Iermieri, who wants to take the pressure off those who see this reserve as an unattainable goal.
According to this planner, analyzing your expenses also allows you to see what is going wrong. Which is a great thing.
It’s difficult to set a financial plan in stone: if a student debt is finally paid off, maybe we can treat ourselves to a vacation this year. Conversely, we sometimes have to slow down on spending on pleasure, racking our brains a little to maintain the same standard of living by reducing particularly expensive outings.
Planning is often a process of trial and error. “I put in 10%, I’m trying that for six months,” illustrates Angela Iermieri. If I find it’s going well, I continue or increase; If it’s too much, we’ll do something else. »
The financial planner advises making budget reviews whenever life changes, since family, personal and professional situations greatly influence spending and savings categories.
For some people, there’s no chance that basic expenses will make up 50% of income.
If your situation does not correspond at all to the models proposed, ask for advice, says Béatrice Bernard-Poulin. “Once you have put the numbers on paper, the best thing to do is to seek professional advice. » Especially if the findings are worrying.
“When you have difficulty, you can get support from a financial advisor or ACEF,” also says Angela Iermieri.