Is the 50/20/30 budget rule effective?
There is no one-size fits all when it comes to budgeting, but what if there was a rule you could follow that could significantly reduce your debt and save more? The 50/20/30 budget rule is the most talked about method when it comes to managing your finances, and some people swear by it because it’s an easy-to-follow method when it comes to managing expenses across your wants, needs and savings.
It’s important to keep in mind that everyone has different financial goals and this method may not be the best one to follow, especially if what you have in mind is a three-month escape to Europe instead of a deposit for that dream house. Skillstalk explore what the 50/20/30 rule is and its pros and cons when you implement it into your current personal finances.
What is the 50/20/30 budget rule?
The 50/20/30 budget rule was created by Elizabeth Warren, the author of “All Your Worth: The Ultimate Lifetime Money Plan.” This rule is meant to be used when sorting out after-tax income and is divided into the following categories: 50% on needs, 30% on wants and 20% savings.
How can I budget using the 50/20/30 rule?
Using the rule is easy if you’re working full-time with a stable income. You could be receiving your wage through weekly, fortnightly or monthly instalments, splitting it accordingly to the 50/20/30 rule.
However, it’s important to keep in mind that managing your finances using the rule may not be efficient if you’re working as a freelancer. As your income may fluctuate from time to time, it’s important to adjust the budget rule so you do not save more than you should be, especially if you have fixed expenses that need tending to.
Here is a clear breakdown of the 50/20/30 rule:
50% on needs
The “needs” category is all the expenses that are essential for your day-to-day. So, this applies to your food (not to be confused with dining out), housing, utilities and associated transport costs. Essentially, you will spend no more than 50% of your after-tax income in the needs category.
While this may be simple to understand, it’s important to recognise what bills count as “needs”. For example, your Netflix or Spotify subscription can count as an ongoing expense but it wouldn’t fall under this category, since this is more of a want rather than a need. Extending from the food and housing costs, a need could be paying off existing debts such as a maxed out credit card, car loan or an outstanding tax bill.
30% on wants
The “wants” category is everything from shopping, dining out, movies, overseas trips and everything else in-between that puts the fun in life. These expenses are all the luxury items you want such as making physical modifications to your car, entertainment subscriptions like YouTube premium or saving money for your dream holiday destination.
20% on savings
The “savings” category fits into your long-term financial goals such as saving up for a house deposit, building an emergency fund, or topping up your superannuation for retirement. Savings can also count as making extra repayments to your existing debts or be used for investments.
Will the 50/20/30 rule help me budget effectively?
While the 50/30/20 budget rule is simplistic and very easy to follow, everyone has different goals when it comes to their finances and it may not be the best option especially if you’re working part-time or is a freelancer living paycheque-to-paycheque.
Although the idea of it sounds great, the execution may be different depending on what you’re saving for. In order to budget effectively, you may need to look at your outgoing expenses and see how much income you can actually put aside to your needs, wants and savings.
The budget rule can also be amended into the following:
60/20/20 budget rule
This rule was implemented by Scott Pape, a financial advisor who wrote the popular finance book, “The Barefoot Investor: The Money Guide You’ll Ever Need” and he suggests that 60% should go towards needs, 20% for wants (aka splurge in his terms) and 20% for savings. This rule works well, especially for people who think 30% of their disposable income for wants is a bit excessive. This amends the rule to 60/20/20.
80/20 budget rule
If you don’t like the idea of budgeting at all and want an even more simple method when it comes to your finances, the 80/20 rule could work in your favour. Put yourself in autopilot mode by setting aside 20% towards savings and spending the rest of your income (80%) is totally up to you.
While saving 20% of your income is a good minimum, it’s encouraged to save more. So, amend the rule to 70/30 or 60/40 if you can afford it.
Any budget tips that will help me save more?
- Get out of debt.
- Take on a side hustle.
- Ask for a pay rise or promotion.
- Live within your means.
If you need more advice when it comes to your finances, here are some other budget tips you should consider to help boost your savings:
1. Get out of debt.
Getting out of debt is tricky, especially if you’re in the process of paying off your HELP loan or have financed for a new car with a small deposit. The best way to put yourself in a comfortable financial situation is to get rid of debt.
Not only will it help take control of your expenses but once you pay off a high interest loan, you will feel so much happier knowing that your hard-earned money isn’t going towards interest. If you can afford it, be sure to make extra repayments especially if you have taken out a car loan or mortgage.
2. Take on a side hustle.
You may be living on a tight budget but happy with your current job, or perhaps you have skills that you want to take advantage of since you have your weekends free and want to earn extra income. Picking up a side hustle is a great way to earn more and can even put you in a better position where you’re not so stressed about paying for your ongoing expenses and gives you room to save as well.
3. Ask for a pay rise or a promotion.
If you have a busy job and don’t have time to pick up a side hustle, asking for a pay rise or promotion can help you save more. Not only will increased pay make you a more motivated employee but it also encourages you to work harder and prove to your manager that you deserve one. Whether that be taking on more responsibilities or upskilling to get the promotion you want, receiving a pay rise is a nice incentive and can help you reach your financial goals much faster.
4. Live within your means.
You may have a luxury car because you’re a car enthusiast, but are you able to afford the costs associated with it? Do you really need to book a 5-star hotel for your next holiday? Asking these questions can help you understand your current earnings and differentiate between a want or need.
It’s important that you justify your current spendings and always question what the purpose of a purchase is before you bite the bullet. Be financially sound when it comes to what you can and can’t afford and never be swayed into something you know sounds “nice” but in reality will not help your financial situation, especially if you already have existing debt.
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This article should not be taken as expert financial advice. Please consult a financial specialist for further advice on your circumstances.
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