How to Divide Your Income

How to divide your salary - the li ka shing way

Way back in January 2015, I was reading Kapitalust’s latest blog post ‘Advice from Li Ka-Shing: One of the Richest Men in the World’.  Now, you may think: ‘so what?’ and yes, so what, I was reading a blog post, whoop-de-do. But this is not just any old blog post, and not just any old blog post about personal finance, FIRE, or living frugally. The post quotes (although Steve can’t really remember where he originally got it from) Li’s advice on how to divide your salary i.e. how much to spend on various outgoings. I found this fascinating, and immediately printed off a copy.

Is this advice the answer to all your money questions?

Over the several months that followed, I often thought about the advice and the divisions. It seemed to answer so many questions, or at least be a pretty decent guide towards questions such as:

  1. how to divide my paycheque
  2. how to divide my salary
  3. how much to spend on food
  4. how much to save for a mortgage
  5. how much to save for college or further training
  6. how much to save for a child’s university fees
  7. how much to save for a pension

Now, I know for many people, only living off 30% of your net income would be almost impossible – especially in high cost of living areas, but I think Li was aiming this advice at the young e.g. the 16, 18, or 21 yr old – something like that. You might still be living at home and working your first job, or you just came home from 3 years’ at uni and need to get yourself a bit more sorted financially before moving to your own place. In this case, living off 30% of your income is a lot more doable, I’ll grant you that!

How should I divide my income? There are several ways!

This is obviously just one of many ways to plan how to divide your income into various priorities. In the past, I have done:

  1. the 80-10-10 rule:
    • live off 80%
    • save 10%
    • donate 10%
  2. the Biblical rules on the ‘whole tithe’
    • 2.5% to your spiritual leader
    • 10% to your church or long-term provision fund
    • another 10% split three ways
      • to the poor
      • to inheritance for your kids and grandkids
      • to a holidays and festivals fund
  3. Donate up to 10% whenever you felt someone/some cause warranted it, do what you want with the rest of your money (this was not very successful)
  4. no rules (this one didn’t work at all, LOL, but see Weenie’s comment here on the Fibrarian’s August 2015 budget post – the ‘Anti-budget’)

So basically, as you can see, I like to play around with how to apportion my money. But Li Ka-Shing’s advice just kept coming back to me for some reason. I think I really like the different foci of the 5 ‘funds’ of money. It seemed pretty logical on the whole, and I really liked the idea of being able to take people out to lunch – that’s a legitimate excuse to spend money on eating out!

How we tried to implement Li Ka-Shing’s money plan

I decided to see if we could follow Li’s advice, but soon realised that I would have to make several tweaks. Here is Li’s original apportionment:

  1. 30% on living expenses (he only specifically refers to food though);
  2. 20% on relationship building;
  3. 15% on education (up to 5% on books, the rest saved for courses);
  4. 10% on holidays;
  5. 25% on savings/investments.

Now, the first thing I thought was: ‘there’s nothing going to charity’ (although Li did advocate buying some gifts for your loved ones). We currently give over 5% of our net income to charity, because quite frankly, there are people out there who are desperate and need help that just can’t be obtained from the job centre, the NHS, or the local council. So we have always tried to support charities. There is always someone who is in a bad way, and I can only say that I am grateful for the things we have, the personal relationships, and the opportunities we engage in every day, so why shouldn’t I share those blessings with other people who do not have them yet? Not much excuse is there. Plus, when you’ve been in poverty yourself, or close to it, you can’t help but want to help others anyway – even if it’s only with your time or skills, rather than money.

The second thing I thought when looking through these portions was: ‘we’ve both got advanced degrees from elite universities, and we can borrow books for free from the library, so the education budget can get slashed’. Okay, we can always do professional courses to enhance our careers even more, but they typically don’t cost anywhere near the latest prices for an undergraduate degree. We are saving money for a our little lad, but we are not going to force him to go to uni – he might want to use the money for starting his own business, or for a house deposit, or anything else.

Changes we made to Li’s plan

And so I went on through the 5 ‘funds’ of money in the list, realising that I could make quite a few changes and still have a nice 5-way split of our money. This keeps things relatively simple, and helps to prioritise where you want your money to go. So the way I eventually managed to split everything was as follows:

  1. 50% on living expenses;
  2. 6% on relationship building;
  3. 6.5% on charitable donations;
  4. 7.5% on education;
  5. 10% on holidays;
  6. 20% on savings/investments.

You may notice there are six divisions instead of 5 – this isn’t a mistake, I just split the portions into 6 funds to make room for charitable donations.

I would really like to know what you think about these apportionments. How do you divide your income? Do you think Li’s advice is good, bad, or just plane insane?! Are there any other methods of dividing your income that you have come across, tried, or just plain laughed at?

Let me know, leave a comment below!

Photo credit: "Li Ka Shing" by EdTech Stanford University School of Medicine - Flickr: IMG_5485. Licensed under CC BY 2.0 via Commons - https://commons.wikimedia.org/wiki/File:Li_Ka_Shing.jpg#/media/File:Li_Ka_Shing.jpg

12 Comments

  1. Hi M,

    Thanks for this article especially your proposed change to Li’s advice formula. The charitable is really good for social contribution.

    May I know what is the “relationship building”? Is this for eating out/buying your partner gift?

    My input/experience is a bit different from here, although I had in mind the allocate fund for networking/education/holidays but not a set figure.

    I (and my wife) allocate an amount to generate interest rate from saving, which we pay to my parent and parents-in-law as a way to return them kindness (*about 100$/month, to them and to charity).

    My income and that of my wife’s, we co-save & co-manage and our target is big saving. We don’t have a set formula, unless I dig out the real figure and calculate later. The result is quite good though.

    But I am negotiating a new formula with her, since I plan for a training course, plus a holidays planning in Australia soon.

    Thanks.
    Kimsan
    Kimsan recently posted…MADMAN – CARDINALREDMy Profile

    1. Hi Kimsan!

      Thanks for visiting the site and taking the time to write this comment. I am really interested in the way different people manage their money. It looks like you are a very thoughtful person, as you are already dividing your income in a considerate manner.

      I think you are right about the relationship building – although Li’s original intention was that you would be using the majority of that fund for networking i.e. buying lunch for other businesspeople/your boss/someonbody you want to learn from. I personally use it to buy lunch/coffees for friends or colleagues and I try to spend time with them and learn from them, because I feel that everyone has an interesting life and dreams. Maybe I can help them one day, so building those relationships will cost time and money.

      Lovely to hear from you,

      Cheers

  2. Thanks for the great post, this is a really interesting concept. I see many people, myself included budgeting our money based on bills rather than in concepts to enhancing our lives i.e. education and that of others i.e. charitable giving.

    This is a practice I may look at pursuing myself in the near future.

    1. Hi TMM, thanks so much for stopping by and leaving a comment.

      I too used to just budget based on bills and necessary expenses, but this way is really positive and fills me with a kind of confidence that my life is progressing in various areas, rather than just being beholden to bills!

      Cheers

  3. I read about it about a year ago as his method of getting rich is a wide spread thing. He’s assume that you’re young and still live with your parents so you shouldn’t be spending much for housing.

    Without knowing his advice, I was living at home until I was 26. I contributed to the household expenses, and continue to help my Dad after I had moved out. But it really made a different. I was making $200-$300/mo in college and “survived” just fine.

  4. Funny, I’d heard of Li before (Hong Kong billionaire) but never knew of his advice re dividing your salary, which I really could have done with right when I started working full-time! Certainly, I would have benefited from his guidance which would have really helped me not get into so much debt!

    At the moment, I don’t have set divisions, just 50% savings/investments (or rather, 30% while I’m paying towards my Japan holiday) and 50% (70%) on everything else.

    Your plan looks good though – perhaps I should do something in respect of charitable donations.
    weenie recently posted…A Not so Frugal OpportunityMy Profile

    1. I wish I’d had his advice too! Especially when I was really young and still living at home with my first Saturday and part-time jobs… I can’t even imagine how much money I wasted back then

  5. Hi M and thanks for the link 🙂

    I think Li’s advice is great for the vast majority of people. It has a clear focus on self improvement and also on saving. For most people the 25% he quoted for saving/investments is a great start and far more than the national average however I don’t think it’s quite enough for a realistic FIRE.

    I see you’ve gone for a figure of 20% in your own model. I’m assuming this doesn’t include pension provision or other fancy secret saving techniques else it seems a bit on the low side?

    1. Hi Fibrarian, thanks for stopping by.

      I agree that Li’s advice is excellent for people who are just starting out. 25% is way higher than what most people from the general population (UK/USA) manage, so should actually help them a lot if they can stick with it.

      In terms of our own savings proportion, we currently are saving around 28-31% of our net income per month. This doesn’t include pre-tax pension contributions though. Li’s advice to save is first intended to be put towards a small business – that is his recipe for success towards wealth (and FI presumably). He advocated small retail/wholesale operations as an easy way to get started in making your own money – he said that you wouldn’t lose much if it did fail, but the point of the other divisions is that you would be developing yourself and your network at the same time. Thus, that would also contribute to your new business venture and hopefully ensure success, or least raise your game somewhat.

      So the investment percentage he recommends should also really be considered along with the ‘relationship building’ percentage, as well as the ‘education’ percentage – because theoretically if you’re more educated or have paid for training courses that give you more skills and experience, they will also contribute towards your wealth.

      Maybe then the figure should really be 60% with all these added together – just that the 60% is apportioned into various types of investment, not just savings/other ‘regular’ investments.

      Cheers

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