The 50/30/20 budgeting rule: How it works

If you're looking to create a monthly budget, why not start with a popular and commonly-used framework? The 50/30/20 budgeting rule is a widely-used technique that helps people save better. It involves allocating 50% of your income to essentials, 30% to non-essentials and 20% to savings. This guide will help you learn more about the 50/30/20 rule, and whether it's the best budgeting technique for you.

What is the 50/30/20 rule?

As mentioned, this rule breaks down your monthly income into expenditure for essentials (50%), expenditure for non-essentials (30%) and savings (20%).

50% for essentials

50% sounds like a lot but, it's understandable considering the lifestyle that many of us lead. Essentials include items that you must pay for in order to maintain a basic standard of living, including:

• Essential repayments: Mortgage payments, car loans, credit card bills, school fees and rent payments
• Utilities: Water, gas, electricity, Internet
• Food: Mainly grocery bills
• Transportation: Public transport fees, petrol, vehicle maintenance fees

You can adjust the sub-portions of this 50% according to your individual lifestyle. For example, if you live closer to the city centre, you might want to allocate a higher amount to rent and a lower amount to transport.

30% for non-essentials

Non-essentials are items that you could forfeit and live without. Such items go above and beyond providing a basic standard of living by enhancing your quality of life. They could include the following:

• Memberships and subscriptions: Music streaming subscriptions, a gym membership, television streaming subscriptions
• Luxury food expenses: Takeaway meals, expensive dinners, non-essential grocery items, your daily coffee
• Technology: Expensive speakers, wireless earphones, a new car, a new phone

Once again, depending on your personal preferences, the categories here can be shuffled around. For example, a phone might be an essential for some people. Additionally, you might allocate more to one sub-category than another. A foodie, for example, would probably spend more on luxury food expenses than technology purchases.

20% for savings

Ideally, this 20% is an amount that you set aside and don't touch for years. You might want to park your savings in a high-interest term deposit, your super fund or a savings account. Either way, this cash should bring you closer to both your long-term and short-term financial goals.

How to make the 50/30/20 rule work for you

#1 Understand your spending habits before making a budget

If a budget you've created perfectly meets your current spending lifestyle, more often than not, this means that your budget is too forgiving. Create a budget that provides only a small amount of leeway for overspending. This will force you to re-evaluate your spending habits and cut down on any unsustainable or unnecessary expenses. If you love fashion, for example, you might start planning your expenditure around big sales instead of being tempted to shop every time you walk past your favourite store.

As well as this, creating a budget helps you figure out your spending priorities. Would you prefer to splurge more on your daily coffee or save up for a special night out? Is it more important to have a gym membership or a new car? Such thought processes will help you think through your priorities and make more financially responsible decisions.

#2 Calculate using your after-tax income

Taxes can eat up a large part of your income so it's important to consider them before making a budget. If you don't, you might be under-allocating money to one or all of your categories. Keeping up with an unreasonable budget will not only cause you undue stress, but it could also significantly affect your ability to keep up with essential payments and save money for the future.

#3 Use an online budgeting tool

The best way to apply the 50/30/20 rule is by monitoring your cash inflow and outflow. But if you find that this is too difficult to do manually, an online budgeting app like the Finder app can really help you out.

The Finder app is a smart money management tool that allows you to connect your bank accounts, credit cards, loans and investments to a single dashboard. By being able to access a detailed record of all your earning and spending in one place, it helps you take control of your finances. You can also track monetary transactions, monitor your credit score and shop around for the best deals — all for free.

Is the 50/30/20 rule best for you?

Of course, the 50/30/20 rule may not be the best budgeting method for your lifestyle. In this case, you might want to turn to other popular budgeting techniques, such as:

• Activity-based budgeting. This method involves allocating a percentage of your income to certain activities, for example, food expenses, transportation costs and essential repayments.
• 80/20 budgeting. If you feel too restricted by the 50/30/20 rule, you could always switch up the numbers to an allocation that you're more comfortable with. For example, the 80% spending and 20% savings model is a popular option to consider that allows for much more flexibility.

There's no hard-and-fast rule to creating a budget because no two people are in the exact same financial position. Try out a couple of different allocations and stick to the one that you're most comfortable with.

Why do you need a budget?

We've all probably grown up hearing that budgeting is the best way to manage your finances. However, in order to choose the best budgeting method for yourself, you have to dig deeper than that and figure out exactly how a budget could be useful for you. Here are some common reasons why people choose to create a budget:

• To pay off their debt, including existing vehicle loans or credit card debt.
• To afford large purchases such as a property or a wedding.
• To improve their spending habits and financial health.
• To improve their credit score.

Understanding the underlying reason for your budget is a great way to stay motivated and it means you can better customise your budget plan to suit your needs.