“Go to school, get a good job, work, don’t go crazy spending and everything will be fine. TRUE…? No, not anymore. This advice might have worked in your parents’ time, but today you’ll have to be smarter if you want a good life. Not a little smarter, but super smart. You will have to learn new rules: the rules that no one told you and that no one talks about. And you will have to learn them quickly.” With these words Elisabeth Warren and Amelia Warren Tyagi greet readers in their book All Your Worth: The Ultimate Lifetime Money Plan (2005).
One of the most widespread ideas of this work since its publication 19 years ago is the “50/30/20″ savings rule. These numbers mark the percentage by which monthly income should ideally be managed. According to the ruling, half of the profits will be used for essential expenses: fixed bills and basic needs. A third for leisure. And the remaining money… save it! “It’s easy, really,” the authors insist.
Spain, January, 2024… is it possible to follow this rule? The notable increase in the cost of living in recent years could have made it obsolete.
Despite the sales, the first month of the year brings with it a general increase in prices: it is the usual “January cost”. Last year ended with a lower price increase than in recent months, but this does not mean that the increases at the beginning of 2024 will be milder.
Energy taxes will increase progressively starting in 2024. On electricity and gas bills, where the VAT applied increases from 5% to 10%, the bill for average consumption is expected to become 6.8% more expensive and 4.35% respectively, according to calculations on the cheapest rates on the free market by Kelisto, an insurance, finance and internet comparator. Telephony also goes up. Vodafone increases its fiber and mobile rates by 4.35% based on the CPI and Movistar by 2.98%, affecting the bills of more than 9.6 million customers.
However, it is car insurance that shows the most pronounced increase in price, with an increase of 29.4% in the last quarter of 2023 compared to the same period in 2022, the largest year-on-year increase in a year.
“Although it is expected that some increases will moderate throughout the year or even turn into decreases – such as that related to variable mortgages, with the Euribor in decline since last October – there are others that will remain , such as those related to internet and telephone bills and car insurance,” explains Estefanía González, spokesperson for Kelisto.
Xavier Freixas, professor of Financial Economics and professor at the Pompeu Fabra University (UPF), explains that this month’s price rise is a very Spanish market behavior. “The price adjustment by all market players leads to a general increase to imitate the competition.” The phenomenon forces residents to plan consumption, “not only in the last few months, but throughout the year,” he recalls.
However, the latest data available for the third quarter of 2023 from the National Statistics Institute (INE) reflect that Spaniards will have to face the current price increase after having increased their purchases and, consequently, having saved less. Thus, the household savings rate is estimated at 7,027 million, which decreases compared to the previous quarter and stands at 9.1%, eliminating seasonal and calendar effects.
In this context, Intrum’s European Consumer Payments Report highlights that 50% of the Spanish population has less money now than a year ago after paying their essential expenses and bills. As a result, the same half of respondents say they will have to reduce the amount of money they set aside monthly to protect themselves from inflation and high interest rates. 59% will also have to cancel or reduce their spending on a holiday or weekend getaway in the next 12 months.
The current situation leads us to wonder: how many Spanish families can afford to dedicate only half of their income to essential expenses, while saving 20% ??each month? “First, it is crucial to recognize that not all situations are the same. In a context where there are workers with limited income, their priority may be, before saving, to ensure basic needs such as housing, food and health,” recalls Toni Cárdenas, manager and analyst at Caja Ingenieros.
In a country where 20.4% of the population, that is, 9.6 million people, are at risk of poverty, the “50/30/20” rule is not realistic when one does not have a comfortable economic situation. Although the book explains that these percentages should be perceived as a goal, “something to aspire to” according to the authors, it does not apply to the daily lives of many Spaniards. Cárdenas insists that saving is, and should be, a healthy financial practice, not an imposition. “We must consider that each individual faces a specific situation. “Rather than imposing savings as an absolute priority, we recommend a balanced approach.”
Freixas believes that a good way to change our habits is to take advantage of temporary income. Milton Friedman, winner of the Nobel Prize in Economics in 1976, distinguishes earnings between permanent earnings, such as monthly salary, and transitory earnings—bonuses, random and “unexpected” income. “The theory of rational choice explains to us that if we find a bill on the ground we will spend it faster, because the effort to get it is less. Why don’t we save it?” he asks.
Financial education is another pillar in the savings equation. “Many times we find it difficult to save because we don’t know what to do with our money,” says Freixas. In these cases, financial education has a multiplying effect on savings. “It is more exciting to save when we discover that by doing things well we can increase the profitability of our money.”