I’ve read plenty of articles and watched heaps of videos about the ultimate ways to budget. One that I’ve come across a lot is the 50 30 20 rule. First I’m going to talk a bit about budgeting before diving into this popular method.
Proper budgeting is something that pretty much everyone in personal finance will recommend doing.
However, there’s so many different methods out there it can all get a bit much.
If I’d spent as much time working as I have done researching different budget methods, I would probably have enough money to not even need to create one!
The importance of a budget
Budgeting is so frequently recommended, I think sometimes we take its power for granted.
Having a budget isn’t just about trying to be a tight arse. It lets you see exactly what happens with your money.
Because a budget provides you with a clearer picture, you can adjust things to suit your goals.
Budgeting doesn’t have to mean pinching pennies or cutting costs. If you like to spend a load of cash every month on artisan pottery, that’s fine. By creating a budget and setting that money aside for ceramics, you can stop feeling guilty about your guilty pleasures.
Budgeting to save
If saving money is your goal, a budget is going to let you see where your opportunities to save are.
By having a budget and knowing how much you should be spending on necessities and entertainment; you can then work backwards. Once you see how much money you should be able to save each week or month, you can set things up so that you pay yourself first and this comes out straight away.
It’s much easier to stick to a budget when you’re just allowed to spend whatever you’ve got. If you keep leaving your ‘savings’ in with the rest of the budget, I promise you’ll find a way to spend it!
Like I mentioned, I’ve spent a lot of time messing around with unnecessarily complicated budgets.
Because I’ve worked lots of different jobs with various pay, my budgeting has always fluctuated depending on my circumstances.
I’ve learnt that in order for a budget to work and actually be useful, it has to be simple. If it’s too much hassle it’s highly likely you’ll just sack it off!
50 30 20 Rule
This is where the 50 30 20 rule comes in.
As far as personal finance and budgeting goes, it’s pretty straightforward. Those numbers relate to a percentage of your take home pay. Here’s the breakdown:
50% of your pay is for necessities. This includes things like: rent, food, transport, bills etc.
30% is to be spent on wants. So this can be for your entertainment, fun, and artisan pottery.
20% should be savings. This can either be used to pay off debt, save cash, or invest.
Flexibility of the 50 30 20 rule
One of the best things about this method is that it’s flexible.
Everyone has different needs and wants. This method can be adjusted to suit how you like to live your life.
The allowance for fun money is pretty reasonable and the savings percentage can be used how you see fit. If you’ve a higher tolerance for risk you can invest or if you’re more risk averse you can build up a decent cash cushion with an emergency fund.
Structure from the 50 30 20 rule
That being said, this rule also provides a good bit of structure and clarity.
I’m sure you’d agree spending a third of what you earn on fun and entertainment is pretty reasonable. Anything more is kind of excessive.
Your necessities is the area you probably have the least control over. However, if your necessities are way over half of your pay, take a look at what’s going on.
- Are you spending more than you need on a fancy car?
- Should you live in a cheaper neighbourhood?
- Are you being milked on stupidly pricey phone bill?
Although some of your necessities won’t be flexible, try and improve the ones that are.
The ultimate way to budget
Obviously everyone has their own unique circumstances. But if you’re looking for a simple and effective way to provide some structure to your finances, the 50 30 20 rule could be just what you need.
There’s never going to be a perfect budgeting method that suits everyone. However, applying this rule would definitely be helpful for a lot of people.
If you’ve got no budget in place at the moment, why not give this a try?