Knowledge Database

Do you have trouble budgeting? Try the 50/30/20 rule!

I know from speaking to my clients that budgeting is something that many people find extremely difficult. Like life, managing your finances is all about balance. After you’ve met all your bills, you have to decide how to use your disposable income. If you’re finding deciding how much of your hard-earned cash you should dedicate to the pursuit of pleasure and how much you should squirrel away to secure your financial future, the 50/30/20 rule is a simple way to look at the dilemma.

The 50/30/20 approach to managing finances is usually credited to Senator Elizabeth Warren, a woman who knows a bit about finance, having specialised in bankruptcy law. It is very simple you calculate the income you have left after tax and you allocate it as follows:

50% to needs

30% to wants

20% to savings

Let’s take a closer look at these different categories.

Needs – spend 50% of your income on these

No, we’re not talking a night on the cocktails at Bar Rouge , your morning Starbucks or even your Netflix subscription! Needs are those things that are essential for your survival – accommodation costs (rent or mortgage), food, transport to work, insurance, healthcare and utility bills. If you have debts, the minimum debt repayments also count as a need.

You should be able to cover all of these costs with 50% of your post-tax income. If you can’t, you need to look at areas of your life where you can cut back. Ideas include downsizing to a smaller home, switching utilities provider, buying less expensive brands of clothes/food and consolidating debt to reduce minimum payments.

Wants – spend 30% of your income on these

Wants are things that enhance your life but that you could live without. They include meals out and nights on the town, concerts and sporting events, gym membership, weekends away and holidays, the latest gadgetry, designer trainers/handbags/suits etc. If it’s not essential to your survival, it’s a want, not a need.

Wants are also upgrades to a level above that which you really require. While you need to eat, but you don’t have to shop at most expensive grocery stores. The food from a less expensive grocery store will sustain you just as well. You might need a car, but a Mercedes S-class is not a necessity. A Nissan will get you from A to B just as effectively.

Savings – dedicate 20% of your net income to this (at least!)

The remaining one fifth of your income should be channelled into savings and investments. If you have debts, the first thing to do with this savings element is to start paying off the principle (rather that simply meeting the minimum payments which are classed as needs) until you get them cleared.

If you’re debt-free, concentrate first on accumulating an emergency fund in a savings account. This should correspond to six months of essential expenditure (equivalent to your needs as outlined above) and is money to get you through costly unforeseen events such as being made redundant or unexpected medical bills. Once that is done – happy days! – you can start to build your wealth by investing for your retirement and any other financial goals you may have.

If you do have trouble budgeting, the chances are that you will be unsure about the best way to invest your savings. It really is worth taking professional advice over that. A financial adviser will help you clarify your financial goals and put together a retirement savings plan to guarantee you a comfortable life when you stop working, even if that seems like a remote prospect right now. Once that is sorted, you can treat yourself to that S-class!

Feel free to contact me if you need assistance to get your financial planning sorted, whatever stage you are at in the process, if you do get in touch I have a bespoke budgeting tool I built that many of my clients have found super helpful, so feel free to get in touch.