How To Budget Money for Beginners | The 50/30/20 Rule
Knowing how to budget your money can be quite tricky, especially if you are just starting out. The 50/30/20 rule is an easy and beginner-friendly way to manage your finances. It is pretty simple for most people and can serve as a general guide to help you achieve your financial goals.
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What is the 50/30/20 Budget Rule?
The 50/30/20 method was the brainchild of Elizabeth Warren, a former law professor and currently serving as a US Senator. The approach was made known through her book “All Your Worth: The Ultimate Lifetime Money Plan“. It was written in 2005 and was based on extensive research, 2 decades in fact! Since then it has been used by many people due to its simplicity.
This budget system or rule is sometimes called a percentage-based or even bucketing system. You divide your after-tax money into 3 categories – needs, wants and future (save/invest).
Because there are only 3 major buckets, categories or lists, whatever you want to call it, sticking to it and tracking your expenses is less stressful and more straightforward compared to other money budgeting approaches.
Let’s break it down.
The 50/30/20 Rule in Detail
Use 50% for your Needs
This is the biggest chunk of where your money goes and it covers for, you guessed it, necessities. ‘Needs’ or ‘essentials’ are things that are important for your survival. These are things you can’t live without and you are required to pay.
Typically, this includes your accommodation (house rent/mortgage), basic food (eating out and takeaways not included), utilities (electricity, water), transportation. You can also put minimum debt repayments in this category as you still need to pay them. I made a non-exhaustive list down below for reference:
- Household – rent/mortgage, home maintenance, water, sewerage, electricity, gas
- Food – groceries (essential food)
- Communication – phone bills, internet
- Transportation – fuel, car repayments, car insurance, car registration, car maintenance, driver’s licence, public transport, parking and toll fees
- Health and personal care – basic clothing and shoes, medicines, toiletries, health fees
- Minimum Debt repayments – personal loan, credit card payments, other debts (minimum repayments)
You have to decide what your real needs are since our lives are unique to each other, there is no one-size-fits-all list. Some say an internet connection is a need while others think it is not. If you work from home, study or do any jobs online then that is a no-brainer for you. But for example, you go to office 9-5 and do not have to go online except for checking e-mails or occasionally social media, then your mobile phone plan data allowance may be sufficient to cover this.
—- TIP!! —–
If your everyday essentials exceed 50% of your income, try to make some changes. Generally, you can cut costs through some grocery shopping hacks, changing your electricity provider or refinancing your debts.
Put 30% for your Wants
The other 30% of your money is budgeted towards your ‘wants’. Wants are things that are nice and fun. When you think about it though, you know that you can get by without these. It just makes your life more interesting and less boring.
Classic examples are your Netflix subscription, that bubble tea you crave every week or shopping for new clothes because ‘you have nothing to wear’ (I’m guilty!). Luxury items or upgrades are also on this list like the newest smartphone or that designer bag. You can always buy something basic but still serve its purpose.
I also called this non-essential spending in my previous post. Again, the list is variable and can be endless but may include some of the following:
- Food – dining out or food delivery, alcohol, junk food (chocolates, flavoured drinks)
- Entertainment – music/video streaming subscriptions, cable television
- Personal – fashionable clothing and footwear, accessories, gym membership (debatable), hobbies, gadgets, cigarettes
- Miscellaneous – gifts, holidays, birthdays and other celebrations
—- TIP!! —–
Your wants list is where you can cut down expenses the most. Be sure to check which items you no longer enjoy or are not using regularly. It will free up cash!
Keep 20% for the Future
Allocate the remaining part of your income to the ‘future’. The ‘future’ is pretty flexible and depends on your financial goals.
You can save money for a rainy day. Ideally, you should have at least 3 to 6 months worth of your net income stashed should you lose your job or have an emergency expense such as a major house repair.
As an alternative, you can use this cash to pay for other debts (extra repayments too which saves interest) or to add to your retirement fund. Putting the money towards an investment like property or stocks is also a good idea. It is really up to you.
No matter what you chose to do with it, your future self will surely thank you. Maybe you won’t have to get a new loan or you will avoid maxing out your credit card when the time comes. Less debt equals more financial freedom.
Also, remember that the key to building savings and wealth is to save first before spending! So try to really set this percentage aside.
Do not save what is left after spending, instead spend after what is left after saving.
Warren Buffet
Now you understand how it works.
Using the 50/30/20 Budget Rule
Like any budget, you have to put this into practice.
Follow these steps:
- Find out your total monthly after-tax income. Be sure to include all income from all sources like your salary, any government supports, allowance and business earnings (after deductions).
- Allocate your income to the 3 categories as soon as you receive the money. An online calculator can be handy or use a spreadsheet to determine your allocations. You can also use 3 separate bank accounts to distribute the funds. If you do this, get accounts with no keeping fees if possible.
Let’s say you get paid $2000 every fortnight. Your budget categories will look like this:
- Track your expenses regularly or as they occur. Again, apps or spreadsheets can help with this. Otherwise, the good old pen and paper team is waiting for you.
- Review your budget. After a month at least, go back and evaluate how much you actually spent and saved. You may realise that you are spending too much on your wants or your needs. It is then time to go through your expenses and see where you can unload some money.
Other Budgeting Methods
Sometimes, despite your best efforts, your financial situation and unique life circumstances make it impossible to stick to the plan.
If this is the case, change the percentages. You can customise it to say, 60/20/20 or whatever fits you. One important thing is to always save a proportion of your income, even though it is something like 10%. It will go a long way if you are consistent.
The 50/30/20 budget may also appear too simplistic. There are other methods you can explore, one of which I discussed here.
When it comes to budgets, what suits many people may not suit you. You’ll have to be patient to try different ones until you find a match.
In a Nutshell
If you are a beginner at budgeting and is looking for an easy way to manage your finances, the 50/30/20 rule could be the one for you. It works simply by dividing your net income to 50% for your needs, 30% for wants and 20% for the future.
With this, you can have a reasonably enjoyable life while having savings or investments.
Divide your net income into these categories as soon as you receive it. Therefore, you are able to save first before you spend. Then, track your spending via an app or a spreadsheet monthly.
Regularly evaluate if your budget plan is working. Change some spending habits if you are overspending. You may even have to make some big lifestyle adjustments to be in sync with your budget plan. Other times, you’ll need to modify the budget itself or find an alternative plan.
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