The 50:30:20 Rule: Spending in Austere Times

The United Nations Federal Credit Union (UNFCU) advises a 50:30:20 rule of thumb for managing finances, where 50% of income goes to needs, 30% to wants, and 20% to savings and investment.

However, concerns have arisen that the current economic situation in Nigeria might have increased the cost of meeting needs alone to over 50% of people’s income.

As a result, failing to provide for necessities can result in poorer welfare and more poverty, unmet wants can result in a worse standard of living, and not having any savings can result in less investment and unavailability of emergency funds.

The actual worth of an N30,000 ($20) minimum wage in 2019 has decreased to N11,708 as of April 2024 due to annual inflation.

This means that the 100% (N11,708) real wage that workers earn now is not even up to N15,000 or 50% of N30,000 they would have used to cater for their needs in 2019. 

With the real minimum wage falling drastically, the ability of Nigerians to adhere to the 50:30:20 rule is weakened. 

For Nigerians, the proportion of household income allocated to meet needs is 69%, while the UNFCU recommendation is just 50%. This implies that a greater percentage of household incomes is allocated to necessities like shelter, food, transportation, and medical care. 

Nigeria’s allocated wants are also 15% less than the UNFCU recommendation of 30%. This implies that spending discretionary income on luxury goods, entertainment, and dining out is more constrained than it should be. 

According to the UNFCU, the Needs that must be met no matter what are Utility bills, Rent or mortgage payments, Health care, and Groceries/food.

Wants are enjoyable things you choose to spend money on, such as restaurant meals, vacations, supplies for hobbies, and subscriptions.

On the other hand, savings are the money put aside to keep for future use or towards some investments. 

The economic situation in Nigeria might force many to spend so much, including their savings, just to meet their basic needs, leading to low welfare and increased poverty. 

These reflect on Nigeria’s purchasing power index, which declined from 13.5 points in 2020 to 9.4 in the 2024 half-year, according to data from Numbeo.

Besides low welfare and poverty, the inability to satisfy wants can reduce the quality of life, which also declined from 55.7 points in 2020 to 47.1 in 2024.

The values of the two indices, the purchasing power index and quality of life index, dropped just as the real minimum wage declined in the long run.

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Taking on the Needs First Approach

Many Nigerians spend their income on needs alone as inflation drives up the cost of basic commodities, leaving little to nothing for wants and savings.

Financial management techniques need to be reevaluated in light of this economic reality. 

It may be more feasible to concentrate on a needs-first strategy, where the main objective is to cover critical expenses while looking for ways to minimise costs, as opposed to rigorously following the 50:30:20 ratio. 

This may entail setting spending priorities, reducing the amount of non-essential purchases, and identifying more affordable substitutes for important goods and services. 

Thanks for reading this edition of Pocket Science. It was written by Khadijat Kareem and edited by Oluseyi Olufemi.