I am always on the lookout for simpler ways to do things. When it comes to budgeting SIMPLE is on the top of my list. The 50/20/30 simple budget rule has been around for a while so I have decided to cover it today.
The 50/20/30 simple budget rule is a bucket/envelope based system in which your money is divided into 3 simple categories. These categories are based on percentages of your net income. (income after taxes)
The largest 50% chunk is for essential expenses that you need to live and should be fairly fixed. These expenses include. Mortgage/Rent, Food, Utilities, Insurance, Transportation, Clothing. The rule is that the total of these expenses should not exceed 50% of your take home pay.
The 30% chunk (my favourite) is dedicated to discretionary spending. Entertainment, holidays, club memberships, hobbies, pets and so on. These are non-essential items that contribute to your quality of life but are not essential.
50% – Essential
20% – Debt/Saving
30% – Discretionary
The 50/20/30 budget is great way to quickly assess your current spending habits and see if there are any areas that are in need of adjustment.
You may notice that your essential chunk is 60 percent or more. Drilling down to find this is due to living in an expensive house or owning expensive vehicles. You would then be able to see that this is taking away from your debt payments and/or discretionary spending categories. Finding out this information would shine a light on the possible issues with your spending and how you could make changes.
This budget is not a hard fast rule it is more of an indicator. It can be adjusted to suit your own investment goals. For instance if you were aiming to increase your Debt/Saving rate to 30 percent you could choose to reduce your Essential and Discretionary expenses by 5 percent each. With this goal in mind you could look into these categories for expenses you could reduce.
A good thing about this budget is that it is percentage based so it does not depend on your income level. In Australia and some other countries employers contributions to retirement accounts (superannuation). These super contributions could count towards the 20% Debt/Saving. You would be in a better position if they were excluded. If your income is variable you may need to take a snapshot of a larger period of time like 6 months or a year.
I would challenge you to categorise your expenses into the 50/20/30 simple budget rule and see how your expenses weigh up. I hope it assists you in working out a budget that suits you and helps you to achieve your financial goals.