A budget is a plan for every dollar you have, and a good budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future.
It’s always best to start with a budgeting system that works for you, but if you aren’t sure where to start, we recommend the 50/30/20 budget system.
What is the 50/30/20 budget system?
The popular 50/30/20 budget is a great way to maximise your money. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.
We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.
How to use the 50/30/20 budget system
Guide to the 50/30/20 Budget
Allow up to 50% of your income for needs
Your needs — about 50% of your after-tax income — should include:
- Basic utilities, like electricity bills.
- Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
- Child care or other expenses you need so you can work.
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 leaves you more to work with elsewhere.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide. 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 you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.
Every budget needs both wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money you’re entitled to spend as you wish.
Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget — and a good budget is one you’ll stick with.