Budgeting made simple with 50/30/20 rule
Quite a few clients contact me asking me for a budgeting tool to use to help them understand their finances a bit better and where they should make allocations.
I want to answer these calls by outlining this simple strategy before heading back into our discussions around the different asset classes.
The 50/30/20 rule is a popular budgeting guideline that suggests allocating your income into three categories: needs, wants, and savings.
This is a simple strategy that can easily be managed and followed. The great thing is that it ensures both that your most important expenses are paid and that the future is budgeted for.
Here’s a breakdown of each category:
1. Needs (50% of income):
This category includes essential expenses that cover your basic living needs. Common examples include:
● Rent or mortgage payments;
● Utilities (electricity, water, gas);
● Groceries;
● Transport (car payments, fuel, insurance, bus/train/taxi fare);
● Health insurance; and
● Minimum debt payments (credit cards, student loans).
2. Wants (30% of income):
This category covers discretionary expenses and things that bring you enjoyment but are not essential for survival. Some examples include:
● Dining out;
● Entertainment (movies, concerts, hobbies);
Travel;
● Streaming services; and
● Shopping for non-essential items.
3. Savings (20% of income):
This category focuses on building your savings and planning for the future. It is important to prioritise saving money for emergencies, retirement, and other financial goals. Some examples include:
● Emergency fund;
● Retirement contributions;
● Investments;
● Saving for future education expenses; and
● Down payment for a home. Following the 50/30/20 rule can help you maintain a balanced financial lifestyle by ensuring that you cover your essential needs, enjoy a bit of play time with some discretionary spending, and yet still save for the future as well.
However, it’s worth noting that everyone’s financial situation is unique, so feel free to adjust these percentages based on your specific circumstances and goals.
Next week I’ll give a practical example of a client who wants to make a monthly instalment investment.
I will give a few investment options to guide them through the process.