Budgeting can seem daunting, but it doesn’t have to be. The best ways to budget are often the simplest. The 50/30/20 rule is an example of simplicity. A monthly budgeting method tells you exactly how much to save and spend.
What is it?
The basic rule of thumb is you divide your after-tax income monthly into three categories: 50 per cent towards needs, 30 per cent for wants and 20 per cent for savings/debt. The way it works is you can regularly keep your expenses balanced across the three main spending areas. With only these three areas, you can save time and stress over every cent you spend and save.
The 50/30/20 rule is a great way to start building a habit and bring structure into your spending. Once you get started, you can alter it to suit your lifestyle, needs and saving goals. Whether that’s paying off debt or just having some emergency funds – this saving rule can help you work your way to achieving any goal.
What are the categories?
Knowing exactly how much you spend in each category will make it easier to stick to a budget and prevent unnecessary spending. Here’s an example of what a 50/30/20 budget can look like:
Need (50 per cent)
Your needs include any expenses that you can’t avoid, including:
- Monthly rent
- Electricity and gas bills
So whatever your income is, 50 per cent of it has to be going towards these kinds of expenses. This can be altered from person to person; for example, if you find that more than 50 per cent of your budget is going towards your needs, then adjust your other two categories to suit this. Alternatively, look for more cost-effective swaps to lower the overall monthly cost of these items.
Wants (30 per cent)
After your needs are taken care of, you can focus on your wants. These are non-essential expenses that you choose to spend your money on. This can include:
- Eating out
- Self-care (spa, hair etc.)
If you find that these items begin to exceed the 30 per cent rule, think about what you can cut back on our swap out. You don’t need to cut out anything entirely – you have money to spend on yourself and enjoy your life as you want. This rule will help you become more conscious about how and where you spend your money.
Saving/Debts (20 per cent)
The remaining 20 per cent of your income goes towards saving for any short-term or long-term goals you may have or to pay off any outstanding debts you may have. This doesn’t include minimum repayment (as these are considered a need), but any extra repayments you want to tick off.
This can help you build a more durable savings habit – so whatever comes your way, you’re prepared for. So regardless of whether you’re building an emergency fund, saving for a trip, or paying for a house, you will have a steady flow of money going to your savings.
How to apply it?
The first step is to calculate your after-tax income. Step two is to organise your spending from the previous month to see how much you need to change – split it into three categories. Here, you can evaluate how much you are spending to fit into the 50/30/20 rule.
Saving can be difficult, especially when life throws unexpected expenses at us. But by following the 50/30/20 rule, you can plan how you should manage your after-tax income and alter it to fit your lifestyle. A Life Beyond Numbers should be enjoyed, so if you’re looking for more information about money management – contact us here.