Guide to the 50/30/20 Budget

A budget is a plan for your money — it helps you balance your incomings with your outgoings, so you can reach your financial goals.

A good budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future.

Not all budgeting system are the same, so it’s important to find the one that works best for you. But, if you don’t know where to start, we recommend trying the 50/30/20 budget system.

What is the 50/30/20 budget system?

The 50/30/20 budget is a great way to maximise your money and set consistent priorities.

It requires you to spend:

Over the long term, someone who follows these guidelines will likely have manageable debt, room to indulge occasionally, savings to pay irregular or unexpected expenses, and can retire comfortably.

How to use the 50/30/20 budget system

1. Allow up to 50% of your income for needs

Your needs — about 50% of your after-tax income — should include:

If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.

Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a cheaper mobile phone plan, an opportunity to refinance your home loan or less expensive car insurance. That way, you can save money, and have more to work with elsewhere.

2. Leave 30% of your income for wants

Separating your needs from discretionary spending (your wants) can be difficult. In general, though, needs are essential for living and working. Wants, on the other hand, typically include expenses like dinners out, gifts, travel and entertainment.

It’s not always easy to tell the two apart. Are restorative spa visits a want or a need? How about organic groceries? Decisions vary from person to person.

If you’re eager to get out of debt as fast as possible, you may decide your wants can wait until you have some savings in the bank and your debts are under control. But your budget shouldn’t be so austere that you can never buy anything for fun.

Every budget needs wiggle room between the two — maybe you forgot about an expense and need a little extra to cover it, or a family milestone calls for celebration and a dinner out is just the thing.

Your budget is a tool to help you, not a straitjacket to keep you from enjoying life. If there’s no money for fun, you’ll be less likely to stick with your budget — and a good budget is one you stick with.

3. Commit 20% of your income to savings and debt repayment

Put away at least 20% of your after-tax income for the unexpected, future savings and paying off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing financial goals.

When repaying debt, try tackling the high-interest balances first, like credit cards and personal loans. Then move on to the lower interest items like mortgages. This is often referred to as the avalanche method. An alternative to the avalanche method is the snowball method — focus on the smallest sized debt first, and then work your way up to the largest debt.

When saving money, consider putting any surplus cash in a high interest savings account or making extra payments to your super account.