Budgeting is more than just knowing how much you make and spend each month, a budget should determine how much you spend and save each month. The 50/30/20 rule of budgeting, also called the 50/30/20 budget is a proportional guideline that can help you keep your spending and saving balanced.
Everyone, especially young adults just starting out in the world of budgeting can benefit greatly from this simple budget plan. When you know how to create a balanced budget, you can take the next step, and further customise it to your own needs. Using the 50/30/20 budget can also help you achieve wealth in life, and keep building it.
So, lets get down to it.
If you haven’t already read my post, How to Create a Budget, I suggest you read it now, then come back to this post, it will explain how you can go about creating your 50/30/20 Budget, and calculating expenses.
50% of Your Income – Essentials
As the title says, you should be spending no more than 50% of your after tax income on things like rent/mortgage, shopping, electric, insurances, car fuel, car payments, heating oil and any other monthly expense that is essential. Gym memberships, Netflix… they are not essentials.
Any payment that you can forgo with only a small inconvenience, like Sky TV, gym and so on is a want, canceling a payment that would severely impact your quality of life, such as heating oil, is a must. You only want to include musts in this section of the budget.
If you are way over 50%, then you are living above your means, so either downsize your house, sell that new car, or work more.
Examples of things in this category (I include basically everything that I can’t live without)
Fuel for Car
Any Loans (Try and get them paid off)
Internet Bill (I use it for work, so it comes under this category)
30% of Your Income – Personal
This category is the one you can make the biggest difference to. Thing that are included in it are holidays, eating out, buying random things, gym memberships, new shoes and so on. You should take a good look at how you can reduce spending in this category, for example, if you don’t take a packed lunch to work, and eat out everyday, you could be spending around £100 a month, compared to £30 odd if you made your own lunch. If you smoke, quit smoking, if you drink lots, stop, its bad for you anyway.
I do not have any direct debits coming out of my 30% account, I don’t go to a gym, don’t have Sky TV, don’t have an expensive car or high car payments, so basically the 30% I get, I can spend it on whatever the hell I want, most of the time, I end up with some left, in which case, I roll it over to next month.
Examples of things in this category
Buying yourself something nice
and anything else that is a luxury
20% of Your Income – Savings/Investments
Note: If you have any debts, such as credit cards or loans, use this 20% to pay them off before starting to save anything. I would even try and allocate 30% to paying off debt, and 20% for personal spending.
This is the most important part of my budget, savings and investments. I actually put a little more than 20% of my income into savings and investments, but your should aim for 20% at the very least in order to be financially free when it comes time to retire early.
The term retirement might not mean very much when you are only 20 something, but, you need to start taking it seriously, or you will end up working until you are 67, maybe even longer if the government pension doesn’t fund your lifestyle.
Just remember, the earlier you start saving, the earlier you can retire, or if you decide to work until 67, then the longer your investments can benefit from compound interest. Check out my article on how do I start investing if you are ready to get started!
Examples of things in this category
Cash ISA Savings
Paying off debt
Rainy Day fund
So, hopefully this article has helped you understand the concept of the 50/30/20 budget. Now, you just need to implement it.