Saving with the 50-30-20 rule
Creating a budget is about more than just paying your bills and putting money aside for a rainy day. The most important part about budgeting is knowing how much to portion for each part of your life.
The 50-30-20 rule creates a proportional guideline for you to keep your spending and saving in check, and help fast track your financial goals. With a clear outline of where you should be putting your money, you have the confidence to spend and save, and have realistic weighting so that you can achieve its benchmarks every month. You can use it to help save for that ever-elusive home deposit too!
So, how does it work?
Calculate your after tax income
Your after tax income is the total amount you take home each month after taxes are accounted for. If you work a regular 9-5 job, this amount will be easy to determine from your payslip, but if you are self-employed, you will need to calculate this amount. Generally, it will be made up of your gross income, less your business expenses and the amount you reserve for taxes.
Once you’ve determined your income, then it’s time to start splitting it up.
Limit your needs to 50 percent
Needs comprise the daily essentials you require to get by. This includes groceries, insurance, utilities and bills. Review your budget, and allocate 50 percent of it to needs.
Sounds simple, right? But what’s the distinction between need and want? A need is something that you cannot go without. Like you can’t miss a credit card repayment without copping a late payment fee, you can’t go without your gas or electricity, and you need food to survive.
For wants, it’s 30 percent
This is another step that seems simple in theory. 30 percent of your paycheck that can go on pure wants – great! But remember the definition of need. If only the daily essentials are classified as needs, this means that a whole host of things fall into the want category.
Wants include things like Netflix or Spotify subscriptions, new clothes (other than bare essentials), meals out, holidays, haircuts and more. There are things that fall into wants that will blur from needs. For example everyday groceries like milk and eggs are a need, while lollies and chocolates fall into the want category.
The final 20 percent goes to financial goals
With your needs and wants aside, the final portion of your after tax salary should go to debt repayments and savings. For credit cards, loans or mortgages, the minimum repayment (the payment required without penalty) classify as needs, and anything you can afford above that should come from the 20 percent for financial goals. Make a conscious effort to put as much as you can towards these savings – you’ll thank yourself in the long run.
Remember the portions for needs and wants are maximum spends, so if you fall under you can put more towards your financial goals. The more money that goes towards savings can equate to more fun down the path – holidays, renovations, new cars and more!
READ MORE: 10 tips for saving for a deposit