By Elizabeth Barry | Personal Loans Editor at Finder.com.au
Budgeting can be tough. It can involve spreadsheets, receipts – and that’s before you’ve even started to realise how much you spend on groceries each week. But even after you’ve worked out your expenses, knowing how much you should save is extremely difficult.
That’s where the 50/30/20 rule comes in. For those who choose to budget this way, it works by splitting your after-tax income into three categories of needs, wants and savings so that you’ll always know what to put into your savings account and what to put towards your credit card – no matter how much you’re earning.
Here’s how it works:
Category 1: Needs (50% of your income)
Your needs are your necessities. This includes your rent or mortgage payments, utilities, groceries, health insurance, car insurance and any expenses relating to your housing or education. For some people your needs may represent no more than half of your income.
You could even include personal loan and car loan payments in this category, as well as the minimum repayment amount on your credit card. Based on personal preference, but for some subscriptions and gym memberships belong in this category as well. Basically, this category is for anything that you have to pay every month.
If you find that your needs take up more than 50% of your income, you may want to consider whether you really need all of your subscriptions or whether you could cut down on any of your expenses. If not, your needs will have to eat into one of your other categories.
Category 2: Wants (30% of your income)
This is your spending category. Anything non-essential such as dinners, weekends away, clothes or games can be put into this category. If you’ve found that your needs are overflowing, you may want to consider moving some of your subscriptions into this category. Good options to consider include gym memberships, magazine and newspaper subscriptions or Netflix and Stan.
Category 3: Savings (20% of your income)
This category is about building your wealth and is one of the more flexible categories out of the three. Depending on your financial circumstances, you may want to put 10% of your income into your savings account and 10% towards paying down your credit card debt (on top of the minimum payments you’re making from your needs category).
If you have no debt, you could consider putting the whole 20% towards your savings account and maybe then investing your funds once you’ve built your balance up, if that works for your goals.
The beauty of this budget formula – other than it working for any income level – is that the third category can help you prioritise your money where you need it most. Everyone is different, so everyone’s needs are different. While building up your savings is important, so is paying down debt, and this formula will hopefully allow you to tweak it to suit your needs over time.
So if you’re looking for a way to get your budget sorted and to start building up your wealth, perhaps try the 50/30/20 rule and see if it can possibly work for you.
Elizabeth Barry is personal loans editor at finder.com.au. She has a passion for smart spending, saving and investing and enjoys reading PDSes so that you don’t have to.