There are many different tools and rules out there that are designed to help you budget and save. The 50 30 20 rule is one of these. It aims to help you simplify your budgeting, divide your income into categories, and help with saving.
The 50 30 20 rule works as a monthly budgeting method. The idea is to split your after-tax income into three categories or money ‘buckets’ – 50% for needs, 30% for wants and 20% for savings or paying off debt. Having only three categories is meant to make the budgeting process easier to follow and track, and therefore take out some of the stress.
This budgeting rule isn’t a new concept and because it is based on a percentage and not a dollar amount, means it’s adaptable to any income and can be a popular choice for budgeting.
Let’s break it down.
The largest chunk of the 50 30 20 budget is the needs category or bucket. An easy way to define this is things you have to pay for, like must-haves and mandatory payments. Generally, these are your living expenses – housing (your home loan or rent), groceries, transport, utilities, healthcare, childcare, insurance, and any minimum loan repayments.
While Netflix and Uber Eats may seem like needs, these are examples of some non-essential costs that make up your wants bucket. This category is ultimately optional items or spending, such as dining out, entertainment, holidays, new clothes or shoes, takeaway coffee or a gym membership. These are things that make life more enjoyable but that you could technically live without. Having this category as a 30% bucket can help you identify if you’re spending too much in this area and can help you be more conscious with your spending.
20% savings and debts
The 20% bucket is reserved for saving money or paying off any debt. This could be paying off a HECS debt or a credit card, or saving for a goal, whether it be a house deposit, emergency fund or financial buffer. This is money you don’t dip into. Extra repayments are also in this category because they can reduce debt and further interest.
While the 50 30 20 rule can be successful and simple budgeting tool, it doesn’t always work and it might not be right for you. While it is flexible, the percentages may not work depending on your life circumstance. For example, it may be too difficult to save 20% on a lower income, but on the other hand if you are working towards a significant goal, 20% saving may not be enough.
The 50 30 20 rule can help plan a budget, but it’s likely not the only budgeting tool you’ll need as it doesn’t track your spending.
To get a better understanding of your income and expenses, check out our budget tracker. We also have a savings calculator which can help you work out how long it’ll take you to reach your savings goals.