The Rule of Thirds
At our recent School Fair, investment professional, Mark E. Baker spoke on families of modest incomes working to save money for things like college savings, or even paying for primary and secondary education. He called it the Rule of Thirds. And, while what follows is not entirely faithful to his explanation, we think it captures the idea. At its core, the Rule of Thirds posits a family might divide its income into three broad categories: needs, wants, and financial goals.
Let’s start with needs. The family should spend about one-third of the income on needs that are required for day-to-day or even month-to-month living. They involve the usual suspects: rent, utilities, transportation, groceries, and household things, insurance and of course minimum debt payments. This category will often involve some sacrifices, for example, a young couple might prefer to live in a $2,400 a month apartment, when they can stay with a parent or can get by with a $2,000 a month apartment. On transportation, perhaps the subway might be less expensive, if less convenient, than using Uber, and the same for lunch. It’s always fun to enjoy a $20/plate lunch with colleagues, but maybe a $15 food truck meal would be less expensive. This is not to say never eat out for lunch or dinner; this is merely to say, keeping within the Rule of Thirds might mean eating out for lunch once per week might be enough until the step increase comes in.
Then there are savings and its handmaiden debt repayment. Here one-third of the income should go to rainy day funds for unforeseen emergencies such as a younger brother whose car broke down, or a government shut down. Here, the family can save for retirement, or (assuming the family has or wants children) a family 529 plan, or even toward the money that will be needed to buy into the partnership. And, of course, beyond the minimal payment of debt, the family can add a few dollars on the student loan or car payments. So, if Sallie Mae is asking for $350 per month for the student loans, the family should see if $370 is possible.
Finally, the final third can be directed to lifestyle and personal choices. Luckily for people living in the DMV, there are many free or very low-cost diversions (e.g., museums, college sports games and plays, outdoor activities). Here, the family can find the money for trips to Canada, Mexico, or some remote part of this very large country. And, of course, who can live without a cute pair of boots and periodic trips to Aveda? BSF, being a charitable organization, believes there is always room for charitable contributions. The expenses of this paragraph are the expenses that make life fun, but if one is to stay within the Rule of Threes, discipline might be needed.
Mark had mentioned a special planning tool called AdviceWorks. It's a workspace for financial planners and families to collaborate, discuss and implement the most effective strategies to benefit personal financial needs. Anyone can contact Mark at markebaker@ceterafs.com or by phone at (202)234-4497, and we’re sure he’d be happy to show anyone how to use the platform.