Budgeting is an important foundation block for building and maintaining wealth. Completing a budget will give you a snapshot overview of your personal finances and help you to understand more about your inflows and outflows. This is especially important if your income or expenses have changed recently and you need to re-assess the way you manage your money. The 50/30/20 budgeting rule is just one example of how you can start to organise your finances in a strategic way.
The 50/30/20 budgeting rule
The 50/30/20 budgeting rule is a common budgeting technique which is a useful starting point for managing your money. It provides a rough guide to how much money should be allocated towards your needs, wants and savings.
50% allocated to needs
We can look at financial needs as the ability to purchase what we need to survive. This includes rent or minimum home loan repayments, transportation, groceries, minimum credit card and car/personal loan repayments, general and personal insurances, private health insurance, education, utilities, phone and internet, etc.
30% allocated to wants
This covers anything that does not fall within the ‘needs’ category. Wants include anything from daily coffee, eating out, shopping, entertainment (e.g. subscription services, such as Netflix), hobbies, holidays, etc.
20% allocated to savings
The final 20% is then allocated to your savings. This includes emergency funds, savings accounts (e.g. saving for a new car or a housing deposit), additional debt repayments, as well as investments inside and/or outside of superannuation.
Applying the 50/30/20 budgeting rule to your income
To apply the 50/30/20 rule to your own finances, you need to firstly map out your after-tax income on either a weekly, fortnightly, monthly, quarterly or yearly basis. You can then divide this amount by 50% for your needs, 30% for your wants and 20% for savings. See an example below.
Is the 50/30/20 budgeting rule right for you?
When you are first starting out with budgeting, the 50/30/20 budgeting rule can be a useful rough guide for managing your money. However, it’s still important to seek professional advice so that your financial plan matched your financial goals and objectives. The team at APS Financial Planning are here to help you create a plan to maintain and grow your wealth, no matter what stage of life you’re in.
If you want to learn more about budgeting, we have also created a FREE e-book: 5 steps to confidently grow your savings (even during a recession!). You’ll get access to our tips and tricks for creating a savings plan that will set you up for years to come and learn more about using the 50/30/20 budgeting rule to organise your finances.