No matter what your financial goals are, a budget can help to make them happen. From managing your day-to-day spending to setting yourself up for the future, it pays to manage your money. Budgeting doesn’t need to be complicated with spreadsheets and formulas or calculators - so here’s a simple way to budget better…
The 50/30/20 budgeting rule
A great place to start is the 50/30/20 rule. This is an easy guide to show the percentage of your salary you should be spending or saving. With this rule you allocate:
- 50% on needs, such as your rent or home loan repayments, transportation, your weekly shop, paying off any debt, insurances, education and utility bills.
- 30% on wants, such as daily coffee, eating out, shopping, entertainment, hobbies, and holidays, etc.
- 20% on savings, such as an emergency fund, savings accounts (e.g. saving for a new car or a housing deposit), additional debt repayments, as well as investments inside and/or outside of superannuation.
To demonstrate how it works, let’s use two individuals, Paul and Nicki. Paul has an after-tax income of $52,000 p.a. and Nicki has an after-tax income of $104,000 p.a.. Here’s what that looks like using the 50/30/20 budget method:
Paul - annual income after tax $52,000
| Expenditure (rounded to the nearest dollar) | ||||
| Allocation | Weekly | Fortnightly | Monthly* | Annually |
| 50% needs | $500 | $1,000 | $2,167 | $26,000 |
| 30% wants | $300 | $600 | $1,300 | $15,600 |
| 20% savings | $200 | $400 | $867 | $10,400 |
| TOTAL | $1,000 | $2,000 | $4,334 | $52,000 |
Nicki - annual income after tax $104,000
| Expenditure (rounded to the nearest dollar) | ||||
| Allocation | Weekly | Fortnightly | Monthly* | Annually |
| 50% needs | $1,000 | $2,000 | $4,333 | $52,000 |
| 30% wants | $600 | $1,200 | $2,600 | $31,200 |
| 20% savings | $400 | $800 | $1,733 | $20,800 |
| TOTAL | $2,000 | $4,000 | $8,667 | $104,000 |
*Please note: As there are 52 weeks in a year, not 48 (i.e. four weeks x 12 months), the monthly expenditure has been calculated by multiplying the weekly expenditure by 4.334 (52 weeks / 12 months).
Things to consider
There are many benefits and advantages to creating a budget [link to How to create a budget in 5 steps], but there are occasions when you may want or need to adjust the percentages to fit different circumstances.
High income earners
For those with high incomes, a 50% and 30% allocation towards ‘need’ and ‘wants’ may be too high, encouraging some extra spending. Tweaking the savings percentage could enable you to still live comfortably but reach your saving goals sooner.
Low to middle income earners
For those who live in expensive areas, or with slightly lower incomes, it may prove difficult to only spend 50% of your salary on rent and outgoings. You may need to pinch the percentages for ‘wants’ or ‘savings’ to enable a good lifestyle. It’s all about understanding the balance and introducing some budget planning into your banking routine, if necessary.
Moving forward
A simple approach to budgeting like the 50/30/20 rule, is a great place to start effectively managing your money. Once you’re in a routine and looking to expand your goals - such as building wealth or investing - it may help to seek professional advice. An expert will review your financial situation and advise you on how to achieve your financial goals and objectives.
Remember, as your financial position changes, so should your budgeting. Keep learning and adapting and you’ll see financial success a lot sooner than you may initially think.