The 50/30/20 rule was popularised by American senator and bankruptcy expert, Elizabeth Warren, back in 2005 and has been a part of the financial world ever since. It serves as a great rule of thumb when it comes to allocating your budget. It’s all about splitting your income between necessities, life choices and the future.
Let’s get started…
50% – Necessities
Necessities refer to the bills that you absolutely must pay and are necessary for life. This includes rent or mortgage payments, food shopping, utility payments, minimum debt repayments and insurance. A necessity means that your financial situation or general survival will be under duress if you were not to make payments.
So no, we’re not talking about dining out or getting a few extra drinks at the pub.
Half of your net monthly income should be all that you need to cover any necessities or financial obligations. If you are spending more than that on your necessities, a good idea would be to either cut down on your wants or try to downsize an aspect of your life – such as moving to a more modest home. It’s also a good idea to speak to a financial expert who can assess your financial situation thoroughly and help you to create a tailored financial plan.
30% – Desires
Your desires are the things you spend money on that aren’t absolutely essential to you. They include having dinner at a restaurant, hobbies, holidays, personal items, the latest phone or upgrading your internet connection. Everything that clarifies as a desire should be optional.
We’re certainly not suggesting you should give up on these things and save as much as possible; enjoying life is incredibly important. However, if you’ve found that you’re spending over 30% of your monthly income in this bracket, it may be time to reassess which of your desires is most important to you and factor that into your financial plan.
Desires also include those little upgrades you make when you are enjoying yourself. This includes choosing the more expensive items on the menu or opting for a luxury car over a more economical one.
20% – Retirement and savings
Arguably, the most important part of this budget is the 20% you put towards your financial future. This includes saving for retirement, adding money into your investment portfolio or adding money into a rainy day fund. It’s highly recommended that you have at least 3 months of salary saved in an emergency fund, should an unforeseen event occur. Savings can also include paying down debt over the minimum required payments, as you’re paying down debt and reducing the impact of interest.
It can be quite easy to avoid contributing 20% towards your financial future – everyone is guilty of over-indulging themselves at one point or another. What’s important is making the effort is to remain disciplined in your savings, to build for your future and bring about a more enjoyable and worthwhile retirement.
For more information on developing robust savings habits to go alongside a financial plan that really makes a difference, feel free to get in contact with us today.