More than 1 in 3 people in Australia live from paycheck to paycheck, according to UBank research. If you feel like there's never any money left at the end of the month, the 50/20/30 budgeting rule could help you to take better control of your finances.
This rule of thumb was popularised by Elizabeth Warren and Amelia Warren Tyagi in their best-selling book, All Your Worth: The Ultimate Lifetime Money Plan. It suggests budgeting your income (after tax) as follows:
- 50% on basic needs
- 30% on wants
- 20% on savings and investments
Needs (50%)
The budget suggests that around half of your after-tax income should be spent on the essentials you can't live without, and financial commitments that you're required to pay. This includes:
- rent or mortgage payments
- food and groceries
- transport costs
- health costs
- utility bills
- minimum debt repayments
It might be the case that you spend less or more on your basic needs, which will affect how much you can contribute to the other categories.
Wants (30%)
You don't have to live a bare-bones lifestyle if you can afford to spend a little extra. These are the 'unnecessary' expenses that you don't need to stay alive, but can make life more enjoyable. They include:
- entertainment
- shopping
- dining out
- travel
- choosing more expensive products and services
The budget recommends not spending more than around 30% of your income on wants, especially if you're in debt. If you're struggling to make ends meet, this is the category where sacrifices should be made.
Savings (20%)
Savings are an investment in your future, and you'll get the most benefit if you start saving early. If you can set aside around 20% of your income every month for savings, you'll thank yourself later – but sadly, this is where people are most likely to cut corners.
Savings doesn't only mean putting money into a savings account. It also covers other activities that help you to grow your money and reduce debt, such as investments, building an emergency fund and paying more than the minimum on loans and credit cards every month so you can get out of debt faster and save on interest.
Why is it useful?
While everyone's situation is different, the 50/30/20 rule can be a good starting point for managing your money effectively, especially if you're finding it hard to get out of debt.
It could also highlight areas where you're spending more than you can comfortably afford to, such as if you're spending too much on luxuries or your rent or mortgage eats up too much of your income. Looking for a cheaper rent or refinancing your home could help you to balance your budget more effectively so you don't have to miss out on savings.
Need more budget advice?
If you need a little financial help or want to know how to reduce your debt, speak to a Debt Fix advisor for a no-obligation consultation and free debt assessment.
Call us on 1300 332 834 to speak to our team today.