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:
- Utilities like electricity, hot water and internet
- 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:
- Dining out