Looking at your spending in a new light could make a substantial difference to your financial future. The 50/20/30 budget rule works for one main reason – it’s easy.
You’re new to budgeting. You know how much money you make and have a rough idea of how much you spend. But you’re not really sure about what, exactly, you’re spending it on, or if your spending patterns will benefit you in the long run. The good news? You don’t need complicated spreadsheets and formulas to get your personal finances in check.
Enter the 50/20/30 budget rule, a kind of yardstick to guide your spending patterns. The concept was popularised by bankruptcy expert and US senator Elizabeth Warren, who co-wrote All Your Worth: The Ultimate Lifetime Money Plan with her daughter, Amelia Warren Tyagi. The essence is to keep your budget simple: the easier it is to understand, the easier it is to stick to.
What is the 50/20/30 rule (or 50-30-20)?
The 50-30-20 rule suggests breaking up your expenses into three categories:
Needs. Ideally, you’d spend 50% of your after-tax income on essential living expenses, like rent or your mortgage, other loan payments, groceries, bills, insurance and transportation.
Savings. Next, you’d channel 20% of your income into your financial goals, whether that’s building an emergency fund, boosting your superannuation or resolving debt payments.
Wants. The final 30% of your money would be allocated to things that make your life a little more enjoyable, but aren’t necessary to get by. Think new clothes, concert tickets, a holiday or a meal out with friends.
Consider the figures for categories 1 and 3 as a guiding principle – if you spend less than what you budgeted for in either category, the surplus can be channelled into things such as extra mortgage repayments, general savings or investments.
How to create a 50/20/30 plan
To put this budgeting plan into action, you need to have more than a rough idea of what you spend. This money management exercise requires you to tally up your monthly expenses – remember to include averages for bills that might be infrequent – and then break them up into ‘needs’ and ‘wants’.
If you’re currently spending 60% of your income on needs and 40% on wants, you probably won’t be surprised to find you’re not saving anything for your future. This is the time to reassess where you can cut back to start saving more in each category.
Needs: Can you get a better deal on your phone plan? Can you plan weekly menus to reduce your grocery bills? Do you need to take more drastic measures, like moving house to reduce the amount you spend on rent or your mortgage?
Wants: Can you go without takeaway coffee this month? Do you have to go out to dinner three times a week? Is that new jacket really necessary?
One way to make sure you stay on track with saving money is by splitting your salary/funds as soon as you get paid. You could keep your everyday bank account for your needs, for frequent and easy access. Then consider additional accounts, like the AMP Saver Account, for wants and savings. Set up an automated direct debit for the day after you get paid, so that the cash split from your everyday account happens without you having to do a thing.
Original Author: Produced by AMP_AU and published on 11/03/2020 Source