money allocation — Rules for Saving, Investing, and Spending

Introduction to Allocating Money Between Saving, Investing, and Expenses

In today’s world, full of economic and financial challenges, personal money management is a vital skill essential for achieving financial stability and reaching future goals. Whether you are building an emergency fund, dreaming of buying a home, or planning for a comfortable retirement, understanding the rules for properly allocating money between saving, investing, and daily expenses can make a fundamental difference in your financial journey.

Studies indicate that most people struggle to achieve financial balance, with many finding themselves at the end of the month without any savings, or forced to borrow to cover emergency expenses. This reality makes it necessary to learn practical and proven money allocation rules developed by financial experts over decades.

The Importance of Allocating Monthly Income

The main reason behind the financial chaos many people experience is the lack of a clear plan for allocating their monthly income. The 50-30-20 rule and how to professionally manage your personal finances – Qoyod points out that personal budget management is not just a financial skill, but a strategy that ensures financial stability and the achievement of future goals.

The paramount importance of income allocation lies in several key aspects:

Achieving Financial Stability: When you follow a defined system for allocating your money, you ensure that your basic needs are covered without worrying about running out of money before the end of the month. This stability provides peace of mind and reduces financial stress that affects other aspects of your life.

Building Long-Term Wealth: Regular allocation of funds ensures a fixed portion is dedicated to saving and investing, which helps in gradually building wealth. The Difference Between Saving and Investing | Financial Awareness Promotion Platform clarifies that saving targets short-term goals while investing aims to build long-term wealth.

Avoiding Destructive Debts: By allocating a specific percentage for basic needs and another for wants, you avoid excessive spending that could lead to borrowing or destructive credit card use.

Achieving Financial Goals: Whether your goal is to buy a new car, make a down payment on a home, or retire early, regular money allocation ensures these goals are met on time.

The Difference Between Saving, Investing, and Expenses

Before discussing allocation rules, it is important to understand the fundamental differences between saving, investing, and expenses, as each serves a different purpose in your financial plan.

Expenses (Daily Expenditures)

Expenses are divided into two main types:

Essential Expenses (Needs): These include rent or mortgage payments, utility bills (electricity, water, gas), basic food, transportation, medicines and medical treatment, insurance premiums, and minimum debt payments. These expenses cannot be avoided or postponed and must be covered monthly.

Non-Essential Expenses (Wants): These include dining out, entertainment, travel, extra clothing, gifts, subscriptions to non-essential services, and recreational shopping. These expenses can be adjusted or postponed depending on the financial situation.

Saving

The difference between saving and investing clarifies that saving aims to accumulate a sum of money in a safe place for use in the near future (3 months to 3 years).

Characteristics of Saving:

• Security: Nearly zero risk

• Liquidity: Easily accessible when needed

• Return: Low but steady interest

• Purpose: Emergency fund, short-term goals

Examples of Saving:

• Savings accounts in banks

• Short-term deposits

• Money market funds

Investing

Investing aims to grow and increase money over the long term (more than 3 years) by purchasing assets that increase in value over time.

Characteristics of Investing:

• Return: Potential for high returns

• Risk: Varies from low to high

• Time: Requires a long period to achieve best results

• Purpose: Wealth building, retirement, long-term goals

Examples of Investing:

• Stocks and bonds

• Real estate

• Gold and precious metals

• Investment funds

The Golden 50/30/20 Rule

The 50/30/20 rule is one of the most famous and simplest financial rules developed by US Senator Elizabeth Warren. The 50/30/20 Rule: An Easy and Successful Budgeting System indicates that this rule aims to eliminate the complexities and difficulties traditionally associated with budgeting.

Rule Explanation

50% for Needs: Half of your monthly income is allocated to cover essential expenses that cannot be done without, such as:

• Rent or mortgage payments

• Electricity, water, and gas bills

• Basic food and consumables

• Transportation and fuel

• Health and medical insurance

• Minimum debt payments

30% for Wants: One-third of your income is allocated to improve your quality of life and enjoy yourself, such as:

• Dining out

• Entertainment and cinema

• Travel and vacations

• Clothing and accessories

• Hobbies and recreational activities

• Subscriptions to entertainment services

20% for Saving and Investing: One-fifth of your income is allocated to building your financial future, such as:

• Emergency fund

• Saving for short-term goals

• Investing in stocks or real estate

• Additional debt payments

• Retirement plan

Practical Example of the 50/30/20 Rule

How to Apply the Rule Practically

The most important steps to apply the 50/30/20 budgeting rule are:

Step One: Assess Current Situation

1. Calculate your net monthly income after taxes and social security.

2. Record all your expenses for one or two months.

3. Categorize expenses into three categories: needs, wants, and savings.

Step Two: Analyze Current Allocation

• Calculate the percentage of each category from your total income.

• Identify gaps and deviations from the ideal rule.

• Discover areas of overspending or underspending.

Step Three: Adjust and Improve

• Reduce essential expenses if they exceed 50% (look for cheaper housing, cook at home).

• Adjust spending on wants to be 30% (reduce dining out, postpone some purchases).

• Allocate liberated funds towards saving and investing.

Step Four: Automation and Follow-up

• Set up automatic transfers of 20% to a savings account.

• Use budgeting apps to track spending.

• Review and adjust your budget monthly.

Alternative Money Allocation Strategies

While the 50/30/20 rule is an excellent starting point, you may need to adjust it according to your personal circumstances and financial goals. The Best Salary Division Methods Recommended by Financial Experts offers several alternatives:

60/20/20 Rule (for High-Cost Cities)

Suitable for individuals living in high-cost-of-living cities:

• 60% for Needs: To cover high rent and living costs.

• 20% for Wants: Temporarily reduce entertainment.

• 20% for Saving and Investing: Maintain the saving rate.

40/30/30 Rule (for High Income)

Suitable for high-income individuals who want to increase savings:

• 40% for Needs: Essential expenses are relatively lower.

• 30% for Wants: Maintain quality of life.

• 30% for Saving and Investing: Accelerate wealth building.

50/10/40 Rule (for Focus on Saving)

Suitable for individuals aiming for early retirement or debt repayment:

• 50% for Needs: Cover only necessities.

• 10% for Wants: Reduce entertainment to a minimum.

• 40% for Saving and Investing: Accelerate goal achievement.

Money Allocation by Salary Level

Salary of 4000 Riyals per Month

For individuals earning 4000 Riyals monthly, the allocation is as follows:

Needs (2000 Riyals):

• Rent: 1200 Riyals

• Food: 400 Riyals

• Transportation: 200 Riyals

• Communications: 100 Riyals

• Other: 100 Riyals

Wants (1200 Riyals):

• Dining out: 400 Riyals

• Entertainment: 300 Riyals

• Clothing: 200 Riyals

• Other: 300 Riyals

Saving and Investing (800 Riyals):

• Emergency fund: 400 Riyals

• Investment: 400 Riyals

Salary of 6000 Riyals per Month

Needs (3000 Riyals):

• Rent: 1800 Riyals

• Food: 600 Riyals

• Transportation: 300 Riyals

• Communications: 150 Riyals

• Other: 150 Riyals

Wants (1800 Riyals):

• Dining out: 600 Riyals

• Entertainment: 450 Riyals

• Clothing: 300 Riyals

• Other: 450 Riyals

Saving and Investing (1200 Riyals):

• Emergency fund: 600 Riyals

• Investment: 600 Riyals

Salary of 8000 Riyals per Month

Needs (4000 Riyals):

• Rent: 2400 Riyals

• Food: 800 Riyals

• Transportation: 400 Riyals

• Communications: 200 Riyals

• Other: 200 Riyals

Wants (2400 Riyals):

• Dining out: 800 Riyals

• Entertainment: 600 Riyals

• Clothing: 400 Riyals

• Other: 600 Riyals

Saving and Investing (1600 Riyals):

• Emergency fund: 800 Riyals

• Investment: 800 Riyals

Common Mistakes in Money Allocation

Top 10 Common Financial Mistakes identifies the following mistakes to avoid:

1. Lack of a Clear Financial Plan

Many start the month without knowing how their salary will be allocated, leading to random spending and running out of money before the end of the month.

Solution: Create a monthly financial plan that clearly defines how every Riyal of your salary will be allocated before you spend it.

2. Confusing Needs and Wants

One of the biggest mistakes is categorizing luxuries as necessities, leading to inflated essential expenses.

Solution: Ask yourself: “Can I live without this thing?” If the answer is yes, it’s a want.

3. Not Building an Emergency Fund

Relying on credit cards or borrowing when a financial emergency occurs leads to accumulating debt.

Solution: Start saving 100 Riyals monthly until you reach an amount that covers 3-6 months of essential expenses.

4. Overspending on Wants

Spending more than 30% of income on wants leads to not having money for saving.

Solution: Set a weekly limit for spending on wants and stick to it.

5. Postponing Saving and Investing

Believing that saving can be postponed until later leads to missing out on financial growth opportunities.

Solution: Pay yourself first – transfer the saving percentage immediately upon receiving your salary.

6. Not Reviewing the Budget Regularly

Financial circumstances change, and not adjusting the budget accordingly leads to its ineffectiveness.

Solution: Review your budget every 3 months and adjust as needed.

7. Over-reliance on Credit Cards

Using credit cards for daily expenses leads to accumulating debt and interest.

Solution: Use cash or a debit card for daily expenses, and keep credit cards for emergencies only.

8. Buying a New Car Instead of a Used One

New cars rapidly lose value and require high payments that affect the budget.

Solution: Buy a good used car or save up to buy a car with cash.

9. Subscribing to Unused Services

Monthly subscriptions to services you don’t use regularly drain your budget.

Solution: Review all your subscriptions monthly and cancel what you don’t need.

10. Not Investing in Education and Personal Development

Ignoring investment in skill development leads to missing out on opportunities to increase income.

Solution: Allocate a portion of your investment budget to develop your professional skills.