We all know the value of creating and following a budget. However, it’s one thing to create a budget, and another to be able to manage and control your budget so you are smashing all your financial goals. There is so much we are expected to juggle in our day-to-day lives. Not only do we have to pay to keep a roof over our heads and the water running, but we want to have enough left over to afford fancy brunches with the girls or the daily lattes that may be one of the only things keeping us sane.
However, we can’t forget the necessity of putting aside a portion of our earnings to save for a rainy day. But how do you know how much is enough? Luckily, there is a proven method for managing your budget and portioning your earnings to maintain a happy lifestyle, save for future goals, and still have enough left over to treat yourself. This intuitive method is called the 20/30/50 budget rule, and as the name suggests, it involves splitting your income to correspond to three essential components of spending: your needs, wants, and savings.
- 50% = Needs: Your needs are very simple, and you probably already know what they are – a need is anything that is necessary for you to live or to maintain your current living standard. Keeping that definition in mind, your most obvious need is the rent for your apartment or house, closely followed by bills and money needed for groceries. Apart from these, its up to you to decide what counts as a ‘necessity’ in your life; for some people their monthly Netflix subscription is worth the investment, while others can’t function without their gym membership. The 20/30/50 budgeting rule suggests that you set aside roughly half of your income towards covering your needs. This rule is also a great way to check whether you are overpaying for one of your expenses.
- 30% = Wants: Your wants are a lot more ambiguous, and definitely a lot more subjective. A simple way of thinking of this component of your budget is as the ‘entertainment’ component. You may choose to spend your 30% whichever way you choose; if you like to go to the movies, splash out your entertainment budget on movie tickets and popcorn, or if you like to explore the newest clubs and restaurants with your friends, devote your 30% towards inventive new drinks and fancy meals. It’s so important to remember not to deprive yourself of life’s little pleasures, as the minute you lose control, you may overindulge and ruin your progress towards your financial goals.
- 20% = Savings: While the ‘want’s’ component of your budget was designed to ensure that you are still enjoying the present, the savings component of your budget will ensure that you have done enough to prepare for the future. Although not as fun as setting aside money for entertainment, setting aside money for saving means that you will be able to afford a beachy vacation in Hawaii that much sooner, or you will be able to cross off a huge financial goal like buying your own home or building up a retirement nest egg. It’s important to remember that there is more than just one way to save. For instance, you can hunt around for a high yields savings account, or consider investing for higher returns.
To wrap up, the 20/30/50 rule is an easy, manageable way to divvy up your finances, but it’s not gospel – if for instance you prefer to have more living space and a consequently higher rent, that is completely fine. Or let’s say, that you’re prepared to live further from the city, so that you have more money for dining out – that’s cool. But in both cases, its important to make sure that when you are adding to one component of your budget that you can safely subtract from another component. With the 20/30/50 budgeting rule, you can walk into 2020 with the financial knowledge and tools to help smash your goals and be your best you!
Written by Vicky Evans
When she is not thinking about her next overseas trip, Vicky can be found with her head buried deep in a book, writing, or binging on Netflix. Her obsessions include adorable cats, interior design, and indulging in ALL the sweet things.