What is the 5 20 30 budget rule?

The 50/30/20 budget is a great budgeting tool for beginners that gives you an easy framework to work from. Using this budget, your monthly income is split into three categories; needs, wants and savings. As a general rule, this looks like:

• 50% Needs - Your needs are your everyday expenses and the essentials you need to live, such as food, rent, utilities, healthcare and transport costs. This can also include debt repayments, such as credit cards or loans.
• 30% Wants - Your wants are things that generally make your life more enjoyable, but are not necessities, such as phone bills, dining out, that morning coffee and other entertainment such as gigs, after-work cocktails and brunches.  
• 20% Savings - Your savings include any and all savings you are setting aside, such as your emergency fund, extra repayments and goal savings.

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What is the 50/30/20 Budgeting Rule?

• The 50-30-20 budget rule is a simple budgeting plan to help people achieve their financial goals.
• The rule says that 50% of your after-tax income must be spent on needs and obligations that you have to meet, such as rent and utilities.
• The remaining half should then be split between 20% savings and debt repayment and 30% to your wants and entertainment.

What are the benefits of the 50/30/20 budget? 

The main benefit of the 50/30/20 rule is that it gives you the chance to reassess your spending, but still gives you the flexibility to do what you want to do. There are a number of reasons you should try the 50/30/20 budgeting rule in your day to day life, including

• Reevaluation - If your rent or mortgage is more than 50% of your take-home pay, it might be time to think about moving somewhere more affordable, or take a look at some refinancing options. 
• Simplicity - The budgeting rules are simple and easy to understand, so you won't get lost in the numbers when you're planning.
• Flexibility - Spending more on wants than savings gives you some wriggle room and lets you enjoy yourself while still putting some money aside.
• Consistency - Knowing where your money is going each month will give you peace of mind and won't leave you with any nasty surprises at the end of the month.

What are the drawbacks of the 50/30/20 budget?

Although this budget is flexible and easy to implement, there are some big drawbacks to this method, including:

• **Vague - **The rules are vague and it can make it easier to hide bad spending habits. For example, if you're a high earner or not spending a lot on your rent you may not need 50% of your budget for your living expenses. The same goes for your wants, that 30% could be put to better use as emergency expenses, or something of more value. 
• Puts off repayments - This budgeting system does not leave a lot of room for paying off any debts you have accrued. Unless you count your debts into your 50%, you only have 20% of your budget to spend on savings and debt repayment. This means if your debts outweigh this you won't be able to make any savings.
• Short-term solution - The 50/30/20 budget isn't a long-term way to manage your money, as it puts savings on the back burner, and your needs, wants and interests will change over time. It also doesn't leave a lot for saving, and you may find that you come up short in certain cases, for example, when you want to take a family trip or have to deal with an unexpected expense

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How to Create a 50/30/20 Budget Plan

You can create a simple 50/30/20 budgeting plan in five easy steps:

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Step 1 - Figure out your income after-tax

Record your monthly income and work out your take-home pay. If you have a regular paycheck each month this will be easy to see from your payslips. If any student repayments, healthcare or super contributions are deducted, add these back into your budget. Add in any extra money you receive from side projects or second jobs, and deduct any taxes or business expenses.

If you're self-employed your after-tax income will be equal to your gross income minus your business expenses.

Step 2 - Record your 50/30/20 split

Once you have your income in front you, start to put together your 50/30/20 split. First, take out your 50% for your needs, such as utilities, housing and groceries. Now it's important to differentiate what your needs and wants are, and set aside your 20% for savings. Be realistic with this, and if it is your first time budgeting give yourself some spending flexibility.

Step 3 - Hold yourself accountable

Record your spending and keep yourself responsible for your spending. You can choose to track your spending with a budgeting app, write it down in a notebook or create your own budgeting spreadsheet just to keep an eye on your running totals as the month goes on. This will also give you visibility into where your money is going, and where you can save easily.

Step 4 - Automate your savings 

Automate your bank transfers as much as you can so the money you've allocated gets there with minimum effort from you.

Step 5 - Reassess 

Revisit your budget often, as your expenses and priorities will change over time. Adjust your budget accordingly to move with these changes, but always keep a budgeting system in place. 

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Example of the 50/30/20 Plan in Action

Meet Ted. Ted brings in $4,000 a month after taxes. That means $2,000 of his income will go towards rent, food, utility bills and any credit card or loan repayments he has. That leaves him with $800 for savings and $1,200 for flexible spending on wants, such as entertainment or dining out. By dividing his budget into living expenses, savings and flexible spending, Ted can see straight away where his restrictions are and how much he can spend each month.

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