start budgeting 50-20-30 rule

Don’t know where to start with budgeting? Try the 50/20/30 rule

17 Feb, 2018

Budgeting is a great way to take control of your finances and set yourself up for a more secure future, but there’s more to it than just paying your bills each month.

Although we at Monefly are big fans of budgets, we know that not everybody shares our passion. Even if you know it’s the sensible thing to do, you might be unsure how to get started.

So here we’re going to explain a simple way you can begin budgeting. It’s called the 50/20/30 rule, also known as the 50/30/20 budget. You can follow this system whatever your income, because it just involves allocating certain percentages for certain purposes. Bonus points if you’ve already guessed what those percentages are, but you’ll have to keep reading to discover what they’re for.

If you’re struggling to save any money each month and a deposit for a home feels like a distant dream, the 50/20/30 budget is a great way to kick-start some healthier spending (and saving) habits. So without any further ado, let’s jump into what it involves.

 

50% of your income is for essentials

The first step is to commit no more than half of your income to absolute necessities. It might sound like a generous allowance, but it can soon be eaten up when you think about everything that’s included.

What should you class as ‘essential’? A good rule of thumb is to include any costs you’d have to pay regardless of where you worked and lived, and whatever you were planning for the future. For most people this includes accommodation, food, transport and utilities. It doesn’t include anything that’s purely a lifestyle choice, like gym memberships and holidays.

The individual costs will look different for each person. You might live in a high-rent area but walk to work, for instance, while someone else may live in the suburbs where housing is cheaper but transport costs more. The point is that all of these things should add up to no more than 50% of your income.

 

20% of your income goes into savings

The next 20% of your income is for savings. This category includes debt repayments, voluntary super contributions, savings plans, and rainy-day funds. These things should all take second priority to your essentials, but they need to be sorted before you even think about the last category of personal spending.

It’s this category which will really help you get ahead in life. And 20% is the minimum, not the maximum. If you can put 30% or even more towards your savings, great! Especially if you have a lot of debt that’s racking up interest, you might want to shift more of your personal spending allowance to this category for a while.

You might not be thinking about retirement just yet, but trust us, your 65-year-old self will thank you for making saving a priority from early on.

 

30% of your income is for personal spending

Finally, it’s the fun part: personal spending. This is basically anything that’s non-essential but enhances your lifestyle. Some old-fashioned financial experts would say this category is completely optional, but we get that everyone has a different perspective on what counts as a necessity.

Technically your cable TV, mobile phone plan and coffee shop trips all fall into this category. Your mobile phone might be up for debate if you need it for work or you travel a lot, but only you can make that call. In any case, you can still choose whether to get a cheap basic phone plan or a more expensive one. And whether you need the latest model or can make do with your old one for a few more months.

Just try to be honest with yourself when deciding whether something is truly necessary, or just nice to have. A lot of this spending will come down to your lifestyle choices and what you’re willing to sacrifice to prepare for the future. Remember that the less you spend in this category, the more progress you can make paying down your debt and building your savings.

50-20-30 budgeting rule

Summary

Once you establish these good habits they will become second nature and your finances will benefit for the rest of your life.

The great thing about this budgeting system is it works whatever level of income you’re on. And as your salary grows, so does the amount you have to spend in each category.

Once you’re used to the core concept and your spending is under control, you can go ahead and customise it a little. You might want to put more into certain investments, for example, or bulk up your savings for a deposit on a home.

At the end of the day, they are guidelines rather than hard-and-fast rules. If you’re in a period of life where your income is low and your rent is crazy, it doesn’t mean you have to go without food just to make the 50% target. You’ll find that even the process of assessing your essential and non-essential spending will make you think more about where all your money goes – so this is a useful exercise in itself.

If you want a handy way to track your spending against your 50/20/30 budget (or any other kind of budget, for that matter), make sure you get the Monefly app for that non-essential mobile phone of yours. Our software makes it easy to monitor your expenses and watch your savings grow towards your goals.

 

To recap on budgeting with the 50/20/30 rule:

  • The 50/20/30 rule is a percentage-based system that splits your income into different categories.
  • 50% of your income is allocated to essential spending like food, housing, utilities and transport.
  • 20% (minimum) is for savings and paying off debt. Put more towards this if you can.
  • 30% goes towards personal spending on any non-essential things like holidays, cable TV, and eating out.
  • You may need to adjust the percentages slightly depending on your personal situation, but the basic principle stays the same.
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