Guide to the 50/30/20 budget
The 50/30/20 budget can help you manage your money by dividing your spending into 3 easy categories: Needs, wants and savings. Here’s how it works.
The 50/30/20 rule is a simple way to budget, which explains why it's so popular. It can be used no matter your income, expenses or goals. This guide will take you through what you need to know about this budgeting strategy and how you can use it to take control of your finances.
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting strategy where you split up your after-tax pay into 3 categories: 50% to needs, 30% to wants and 20% to savings and debt. Dividing your expenses this way makes sure you've got enough money for the things you need (and want) while still making progress towards your savings goals each payday.
How to set up a 50/30/20 budget
Creating your own 50/30/20 budget is actually pretty simple. Start with your after-tax pay and a list of your expenses and then start putting them into your 3 categories: needs, wants and savings/debts.
Here's a more detailed guide for how the categories break down:
Half of your take-home pay is allocated to essential living expenses. This includes the following:
- Housing costs such as rent or mortgage repayments.
- Bills including water, gas, electricity, mobile plans and internet.
- Grocery costs not including takeaway food or similar treats such as restaurant meals.
- Transport costs such as public transport fees, petrol and vehicle maintenance fees.
- Medical fees and costs such as essential medicines, doctor fees and health insurance repayments.
This category is for non-essentials, which are expenses like:
- Memberships and subscriptions such as music and movie streaming subscriptions, gym memberships and yoga classes.
- Luxury food expenses that are outside normal grocery costs, like takeaway meals, restaurant dinners, alcohol and your cafe coffee.
- Retail purchases such as new tech and clothes that aren't essential.
- Recreation like cinema tickets, concerts, massages and weekends away.
Savings and debt (20%)
The third category will look different depending on how much debt you have.
If you have no debt, the entire 20% can be devoted to your savings. If you have some high-interest debt such as personal loans or credit cards you will need to use some or all of this 20% to repay this.
As you repay more debt you can change the split of debt and savings to try to save more.
Creating a 50/30/20 budget (with examples)
1. Apply the 50/30/20 rule to your own income
The first part of this budget strategy is figuring out what you're trying to achieve. Look at your take-home income (after tax) and work out how much money you should assign to each of the 3 categories.
For example, let's say you get paid monthly and you earn $5,000 each month after tax. You'd need to assign $2,500 per month to essentials, $1,500 to non-essentials and $1,000 to savings.
2. Look at your current spending
Now that you know what you're aiming for, it's time to take a deep dive into your current spending habits. Take a look at your transactions over the past few months to see exactly where your money is going.
It can be tricky to get a completely accurate view of your spending because it tends to fluctuate. So, you might want to go through the past 3 months' worth of your expenses to get an idea of what you spend on average.
For example, you might buy breakfast out with friends once every few weeks and organise date night once a fortnight. The cost of these treats and their frequency will fluctuate, but you will get a good average of their monthly cost by seeing it over a 3-month time period.
3. Identify where to make cuts
Now that you've got a clear picture of your current spending habits, it's time to work out what needs to change in order to hit the 20% savings goal. If you're not currently saving any money or not saving 20%, you need to reduce your spending in the other 2 categories.
Here are some spending cuts to consider from your essentials and non-essentials:
- Switch to a lower-tier streaming service plan or consider cancelling one of your subscriptions (if you have more than one)
- Can you cut back on meal delivery services?
- Consider reducing what you spend on entertainment like movies and weekends away
4. Pay off any high-interest debt
Now that you've set yourself a goal and made changes to your spending to achieve it, you'll hopefully be saving at least 20% of your income. But before you start putting this into savings, you should pay off any high-interest debts in full first.
High-interest debts include personal loans or credit cards that attract a high interest rate on your loan amount. Things like your HECS student loan or your home loan aren't included here, as these attract a much lower interest rate and you're already paying these off gradually over time.
Once your high-interest debt is gone, this portion of your income can be 100% dedicated to savings.
5. Consider dedicated bank accounts
You could find it helpful to open 3 dedicated bank accounts to help you manage your spending within these 3 categories. For example, after you get paid into your primary everyday bank account, you can transfer 30% of your pay into another bank account for non-essential spending. Having a separate account for essentials and non-essentials can keep you on track and prevent you from accidentally overspending.
You could also open a high interest savings account to transfer 20% of your pay into each payday. Not only does this keep your savings separate from your spending accounts, but you'll also earn interest to help your savings grow even more.
Pros and cons of the 50/30/20 rule
- Suits most income levels
- Easy to tweak to accommodate your personal spending habits and goals
- Not overly strict and it allows for plenty of discretionary or "fun" spending
- Saving 20% might be unrealistic for some, like if you're living in a major city on a low income
- It relies on you to decide your "wants" vs "needs"
Who came up with this budget rule?
The 50/30/20 budget strategy was introduced by US senator Elizabeth Warren. She discussed the concept in her book All Your Worth: The Ultimate Lifetime Money Plan which was published in 2005.
She advocated for the simplicity of this budgeting strategy, saying in her book: "There are just 3 categories and every dollar that you spend falls within 1 of these 3 categories. Getting these 3 categories right will be the key to getting your money into balance. It's that straightforward. If something gets out of balance, you can spot the results pretty fast."
Does this budget work for everyone?
The exact percentages of 50%, 30% and 20% won't make sense for everyone. If you're a high-income earner, you might find that your essential living expenses are much less than 50% of your income and you can therefore save more than 20% each month.
Similarly, if you're earning a low income but you have high living expenses, such as if you're living in a major city, your essential expenses might be more than 50% of your income.
What if I can't get the 50/30/20 budget to work for me?
The good thing with this budget is you can use the figures as a guide and tweak them to make sense for you and your money. The idea behind the rule is that you set yourself a monthly savings goal and actively adjust your spending in order to meet it.
If you're really struggling to meet the 20% savings goal, lower your goal to 15% or 10% initially and work up from there once you've mastered that. When your income increases, you can also increase your savings goal instead of increasing your other spending allocations.
If you're finding this rule too easy, you can lift the savings target to 25%, 30% or even higher depending on how much you're able to save.
Frequently asked questions
If you're keen to set up a budget but not quite sure which strategy is right for you, take a look at our full guide to budgeting.
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