What is the 50/30/20 budget?

No matter what your financial goals are, a budget can help to make them happen. From managing your day-to-day spending to setting yourself up for the future, it pays to manage your money. Budgeting doesn’t need to be spreadsheets and formulas and calculators, so here’s a simple way to better budgeting:

The 50/30/20 budgeting rule

A great place to starts is the 50/30/20 budget rule. This is an easy guide to show the percentage of your salary you should be spending or saving. With this rule you allocate: 

• 50% on needs, such as your rent or home loan repayments, transportation, your weekly shop, paying off any debt, insurances and health costs, education and utility bills.
• 30% on wants, such as daily coffee, eating out, shopping, entertainment, hobbies, and holidays, etc.
• 20% on savings, such as emergency funds, savings accounts (e.g. saving for a new car or a housing deposit), additional debt repayments, as well as investments inside and/or outside of superannuation.

To show you how it works, let’s use two individuals, one receiving an after-tax income of $52,000 p.a. and the other receiving an after-tax income of $104,000 p.a. with the 50/30/20 budget calculator:

The 50/30/20 budget calculator

Scenario 1 - annual income $52,000

Allocation	Expenditure (rounded to the nearest dollar)
What	Weekly	Fortnightly	Monthly*	Annually
50% Needs	$500	$1,000	$2,167	$26,000
30% Wants	$300	$600	$1,300	$15,600
20% Savings	$200	$400	$867	$10,400
TOTAL	$1,000	$2,000	$4,334	$52,000

Scenario 2 - annual income $104,000

Allocation	Expenditure (rounded to the nearest dollar)
What	Weekly	Fortnightly	Monthly*	Annually
50% Needs	$1,000	$2,000	$4,333	$52,000
30% Wants	$600	$1,200	$2,600	$31,200
20% Savings	$400	$800	$1,733	$20,800
TOTAL	$2,000	$4,000	$8,667	$104,000

Please note: As there are 52 weeks in a year, not 48 (i.e. four weeks x 12 months), the monthly expenditure has been calculated by multiplying the weekly expenditure by 4.334 (52 weeks / 12 months).

So you can see how much is allocated to each category, and how savings can grow over a year.

Things to consider

There are lots of benefits to creating a budget, such as:

1. Helping you to think about the split of living costs and savings, enabling you to not overspend each month, and set yourself up for the future.
2. Making you less affected by interest rate changes and fluctuations that may impact loans or other debts you have.
3. Teaching you the difference between a want and a need, and where to exercise control, and where to embrace the spending.

However, there may be some occasions where you can adjust the percentages to fit your circumstances.

High income earners

For those with high incomes, a 50% and 30% allocation towards need and wants may be too high, encouraging some extra spending. So tweaking the savings percentage could enable you to live comfortably, and reach savings goals even sooner.

Low to middle income earners

For those who live in expensive areas, or with slightly lower incomes, it may prove difficult to only spend 50% of your salary on rent and outgoings. You may need to pinch the percentages for wants or savings to enable a good lifestyle. This is about understanding the balance, and introducing some budget planning into your banking routine.

Moving forward

A simple look at budgeting like the 50/30/20 rule is a great place to start effectively managing your money. Once you’re in a routine and looking to broaden your goals such as building wealth or investing,  it may help to seek professional advice on your financial situation to achieve your financial goals and objectives with a budget sheet.

Remember, as your financial position changes, so should your budgeting. So keep learning and adapting and you’ll see financial success in no time.

We can help with setting up a budget. Contact P&N for a financial health check, or talk to P&N Financial Planning to start to build a financial plan for your future.