Have you ever wondered where your money goes? There’s certainly no shortage of ways for us to spend it – food, rent, gym memberships, bills, dining out… Being aware of how much money you spend on your home, your car and your lifestyle is a great first step to managing your money but have you ever considered whether your spending in in proportion to what you earn?
The 50/30/ 20 rule is a guideline that aligns your spending with your income, and breathes life back into your savings plans.
The rule is simple: divide your take-home pay into three categories:
- 50% – Essentials
- 30 % – Personal
- 20 % – Savings
Step One: Limit your essential ‘fixed costs’ to 50 percent of your earnings
This amount should be no more than 50 percent of your total pay each cycle, and includes housing, food, transport and utility bills. So what are needs, and what are wants, you ask? The rule of thumb here is to treat anything you can forgo with only minor inconvenience (such as foxtel or Netflix) as a want. Anything that would severely impact your quality of life, like water or electricity is a need. Repayments that cannot be forgone, such as credit cards, car loans and your mortgage fall within this 50 percent.
Step Two: Limit your personal ‘wants’ to 30 percent:
Many items fall into this category and it’s up to you to decide what you want and what you’re willing to sacrifice. Your mobile plan, morning coffees, and take-out dinners all fall within this category.
The fewer costs you have here, the more progress you can make reducing debt and securing your future.
Step Three: Allocate at least 20 percent of your earnings towards savings and debt repayments:
This is your ‘get ahead’ zone, which should only be paid after your expenses are taken care of. Here you can add money to a savings account, extra debt repayments, holiday funds or a home deposit (as your mortgage broker, we highly recommend this option!).
Your minimum monthly repayments on credit cards are needs. Anything beyond this is classed as additional debt repayment and qualifies within this 20 percent. If you wish to pay more towards your credit cards and make a dent in the balance, you will need to budget for that here.
The 50/20/30 rule will also flag any imbalances in your spending, and you can tweak your three categories as you need. For example, if you find that more than 50 percent of your income is going towards your fixed needs, you can use funds usually allocated to your 30 percent personal items. If you have a high proportion of debit, this budget gives you the opportunity to reduce unessential personal spending until such time as you are back in control, again. Try not to touch your 20 percent savings to avoid falling behind.
By getting into the habit of using the 50/20/30 rule, budgeting is a far simpler task in your life and you’re guaranteed to gain financial ground rather than being left staring at your bank statements and scratching your head each month.
If you’re interest in splitting your earnings using the 50/30/20 rule, here is a great calculator that will help give you a rough estimate on where your money should be going.