Nothing works better than good old fashion budgeting when it comes to managing your personal finances. But with the avalanche of budgeting advice available, it can be so overwhelming that you decide you’re better off not trying. For a seriously straight forward budgeting tool, try the 50/30/20 budget rule. Here’s a rundown of what it is and how to use it.
What is the 50/30/20 budget rule?
The 50/30/20 guideline is a straightforward and flexible percentage budget concept which divides your after-tax income into three main buckets. The framework gives you a structured way of approaching your finances and ensuring that you meet your monthly financial commitments. Out of all the budgeting concepts out there, this is arguably the most attractive to financial beginners because it’s easy to understand and use.
So how do you use the 50/30/20 rule? Simply divide your income into these 3 areas: 50% into your Needs, 30% into your Wants and 20% into your Savings.
Who is the 50/30/20 rule for?
It’s for anyone who wants a budgeting tool that’s uncomplicated. The 50/30/20 fits the bill perfectly and you don’t even need to be financially literate to use the framework! It’s as simple as splitting your spending into 3 categories, making it a good stepping stone before bouncing into more complex budgeting techniques later down the track.
How do you define Needs, Wants and Savings?
Start with the question ‘is this expense a non-negotiable and integral to my survival?’. If ‘yes’, then it’s a Need. Some examples include:
- Rent
- Food
- Utilities like electricity, hot water and internet
- Transportation
- Loan repayments like mortgage, car loans, credit cards etc
Wants are your lifestyle choices. They’re ‘nice to haves’ and aren’t expenses you require in order to survive. These would include:
- Entertainment
- Dining out
- Holidays
- Hobbies
Savings are just that – money set aside to meet your ultimate financial goals. This could be to establish an emergency fund or more long-term plans like buying a home or working towards being financially independent.
Need some help figuring out how much of your income should be in each bucket? This 50/30/20 calculator from Banzai is a helpful tool which allocates your income into each category.
Where does charity fit into the rule?
Go back to the first question and ask, ‘Is donating a non-negotiable and integral to my survival?’. The answer is very likely to be ‘no’ because donating to charity is a lifestyle choice.
How much out of the 30% Wants bucket you want to contribute to charity will depend on your individual circumstances. How much of your lifestyle are you willing to go without? How often will your donate? What are the tax implications? These are just a few questions you’ll need to answer before deciding what proportion of the 30% you’ll dedicate to charity.
Is the 50/30/20 budget rule realistic?
Personal finances are situational but there’s no denying that living expenses are skyrocketing. Some will look at this formula and say its not do-able in their situation.
Rather than seeing 50/30/20 as a firm budget rule, use it as a guide to understanding where your money is going. See the 50/30/20 framework as giving your structure and something to loosely aspire towards, as opposed to a stressful rule that you either meet or don’t.
Also know that the 50/30/20 split is flexible and you can adjust the percentage breakdown to suit your financial goals and current circumstances.
Someone living in a big city with big expenses might have a 70/30 breakdown. A student who’s still at home will be able (with some discipline!) to have a higher savings percentage. It all depends on everyone’s individual circumstances and the onus is on you to configure a breakdown that meets your immediate situation and long-term goals.
So what should I be focusing on?
The whole point of budgeting is so that you can increase your savings and achieve your financial objectives faster. Aside from giving you a framework to understand and tackle your expenses, the 50/30/20 tool should also highlight areas in which you can cut spending and save more.
Again, how you’ll meet your savings goals will depend on individual circumstances.
But spending a maximum of 50% of your income on Needs is a good rule of thumb to strive towards. Temporarily squeezing budget out of your Wants and Savings budgets with a solid plan to replenish them at a set date is not a bad idea. But continually dipping into those other categories could delay meeting your financial goals. Not to mention that you might be missing out on lifestyle choices that you really enjoy.
If you find yourself spending more than 50% of your income, take a very close look at where it’s all going. Is the majority going to rent? If you’ve been a good renter throughout your lease, speak to your agent/landlord and see if there’s room for movement on rent. Your internet bill costing a fair bit? Bundle your mobile with your internet to see if you can get a better deal. There’s a number of ways to use your dollars more effectively and maximise your savings.