The end of the year is often a time we make plans about where to live, or where to educate our children. It is also the time of year we make decisions about buying big ticket items like cars and homes. 

It should be the time of year you review your budget for the year ahead, taking into account increases in income and expenses.

But just how much should you be spending on each item in your budget? 

A rule that is often quoted in the US is the 50:30:20 rule. It states that you should spend 50% of your after-tax income on fixed costs like your rent or home loan, vehicle repayments and/or other transport costs, insurance, medical cover, education, electricity, water, rates or levies, essential clothing, groceries and security.

In terms of this rule, you should then have 30% available to spend on your wants, like eating out, entertaining, buying expensive clothes or other luxuries or a hobby or DStv.

The rule says that 20% of your income should be for paying down debt or for saving. If you have credit card debt for example, the minimum repayment is a need, but you should use 20% of your income to repay more than the minimum, to save for an emergency or your retirement.

Ester Osche, head of money management at FNB, says the 50:30:20 rule may not be appropriate in South Africa as many things like groceries are cheaper in the US.

John Manyike, head of financial education at Old Mutual, says the 50:30:20 rule is just a guideline but there are a lot of economic realities and dependencies you need to take into account when you set up your own spending rules.

TymeBank’s research shows that 55% of black South Africans are broke three days after payday, indicating that their debt repayment and living expenses are much higher than the 50:30:20 rule suggests they should be, he says.

Many South Africans are struggling with debt and one in two have debt that is overdue, he says. 

Instead of the hard-and-fast rule, commit to getting rid of bad lifestyle debt – debt for things you consume, like food and clothes – and let that and other financial goals inform your spending rules, Manyike says. 

You should be spending only around 36% of your income servicing debt that funds assets like a home – if you are spending 72%, you will struggle to stay in control, he says. 

You need a financial vision which informs your own spending rules, taking into account your earnings, debt and your personal circumstances, including your dependants and black tax dues, Manyike says. 

If you come from a poor background, you will have an “asset deficit” and need to go into overdrive earning and saving, especially given the drag that black tax creates, he says. Set realistic, achievable personal wealth goals.

Osche says if you do not have any emergency savings, this should be your first savings goal – ideally setting aside three months worth of income.

If you look at buying a car, you should not spend more than half your annual salary, she says.

Manyike says going without a car may be a sacrifice you need to make to meet your goals.

Both she and Manyike say many people make the mistake of making ego purchases when buying a car – they like to show their wealth by driving fancy cars. But doing so compromises your retirement, your children’s education or other goals. 

Housing and transport costs are huge for South Africans, Osche says. You don’t want to spend more than 30% of your gross salary on these, given the other expenses we have, she says. 

Differentiate between your needs and wants, she says. “You want a fancy German car but perhaps you only need a small run-about. You may need a roof over your head, but do you need the fancy mansion in Dairfern or is a reasonable three bedroomed house in Randburg sufficient,” Osche asks. 

Manyike says lifestyle choices are the ones we seem to struggle with. If you grew up very poor you may feel peer pressure to validate a better economic status by driving a fancy car, living in a fancy house or wearing fancy clothes. 

But really, you need to shun consumerism and embrace the responsible kind of living that will help you achieve financial success, he says.

Remember your bond repayment is not the only cost involved when you buy property – you also need to budget for rates, taxes, insurance, water, lights – the 30% of your income you spend on housing and transport should include everything, Osche says. 

You must accept that if you want something that you can’t afford, you must save for it. Too few people understand the negative impact of interest on a loan and how it compounds against you, Manyike says. 

A suit you buy for R10,000 on credit will end up costing you R23,000, he says.

Osche says you should be saving at least 10% of your income for long-term savings, but depending on your retirement goals – for example, if you want to travel in retirement, you will need a lot more than someone who plans to stay mostly in South Africa.

The golden rule for retirement is that you – and your employer if you have one that contributes to your retirement savings – should save 15% of your income to a retirement fund for your 40-year working life in order for you to enjoy a pension of 75% of your final salary.  

Other necessities, such as groceries, education and insuring the life of the breadwinner(s) in your family, depends on the stage of your life and your lifestyle. A smoker, for example, will spend more on life cover than a person who goes to the gym four times a week, Osche says.

Both Osche and Manyike think spending 30% on yourself as the American rule suggests is too rich. 

Osche says you should probably spend only between 5% and 10% on yourself.

“I am not saying you should wake up, go to work, go home and eat cereal, but when you choose to treat yourself do something that you can afford,” she says.