THERE are many rules of thumb when it comes to personal finance. Different sources (whether books, online articles, or videos) have suggested different “sign post” rules that we can follow to improve our financial situation.
These include the rules of thumb on the following: savings (common suggestions are 10-percent to 20-percent savings rate per month); on emergency funds (common suggestions are 3-months’ to 6-months’ worth of expenses); on debt payment (snowball method, in which loan payment is paid from smallest to largest debt); on investment (invest in mixture of various asset classes, in alignment with risk appetite of investor); on insurance (coverage should be at least 5-years’ worth of annual expenses); and, many others.
These are good starting points and these should be fine-tuned based on the actual situation and capability of the household. However, these rules of thumb are about the conceptualization and implementation of a financial plan.
Are there any rules of thumb that will help household steer towards financial stability that improves financial foundation, mindset, and can be applied immediately? There are two rules of thumb that could be employed in relation to this: the 3-minute rule when listing expenses and the 3-minute rule when spending.
These 3-minute rules focus on the fundamental part of financial planning, which is cash management. The 3-minute rule when listing expenses just means that in a day with 1,440 minutes, we only need 3 minutes or less to write down our expenses. This is 0.21 percent of our day at most. So, barring any real-time emergencies, the habit of listing expenses should really be practiced by the household and there should likely be little excuse not being able to do so.
One important thing to remember to develop the habit of listing expenses is the adage that “what one can measure, one can improve” or its converse, “one cannot improve on something that could not be measured.” There is no specific format to be followed and listing expenses could be in free-form. What matters is that expenses are being listed regularly. By being mindful of this rule of thumb, listing expenses is being instilled in the household and develops awareness on how a household allocates it financial resources.
The other 3-minute rule is the rule of thumb when spending. This means that it takes 3 minutes to determine whether a small item purchase is worth it. This rule takes from Vicky Robin and Joseph Rodriguez’s book “Your Money or Your Life.” In the book, the authors propose the computation of life energy by dividing after taxes income by the time allocated to earn such income.
The life energy is the time of life spent to earn a peso of a household’s income (e.g. a household allocating 50 hours to earn P10,000 means such household earns P200 per hour and an item worth P1,000 means five hours of work rendered for that item). Knowing a household’s life energy also pivots the household to focus financial resources on what really matters and the rule of thumb of recalling the computed life energy serves as final check before committing to purchase of small items. Giving three minutes to deliberate worthiness of a purchase in terms of life energy promotes mindfulness when spending.
These proposed 3-minute rules can be used quickly and, despite its ease of implementation, the benefits provided by these rules when it comes to cash management are immense. So on our next purchases, let’s decide how many hours of work have we done in exchange and do not forget to write it down.
John Hero Salvador is a registered financial planner of RFP Philippines. To learn more about investment planning, attend the 101st batch of RFP program this May 2023. To register, e-mail info@rfp.ph or text 0917-6248110.
