The 50-30-20 rule is a money management strategy that can help you achieve your financial goals, whether buying a home or building a secure retirement fund.
Keep reading to learn what it is and how to leverage it to increase your savings.
What is the 50-30-20 rule?
The 50-30-20 rule is a strategy to help people, especially those new to money management, better handle their earnings. It splits after-tax income into three simplified categories — 50 per cent for basic needs, 30 per cent for wants, and 20 per cent for savings.
If you’re taking home $5000 monthly, here’s what your budget will look like:
- $2500 for necessities
- $1500 for wants
- $1000 for savings
Following this budgeting framework, anyone can incorporate financial discipline into their lives and slowly build a cushion for retirement or contingency expenses.
Advantages of 50-30-20 rule
Many love this budgeting principle because of these reasons:
- Ease of use: It’s easy to remember and implement without complex calculations.
- Balance the budget: It provides a balanced allocation between needs, wants and savings. Since it’s part of the budget, you won’t have to feel guilty about spending a hundred dollars on a spa day.
- Guaranteed savings: It includes investments to set up a contingency fund to achieve long-term financial security.
- Offset inflation: Prices of goods increase between 2 per cent and 3 per cent. In 2010, you could buy a two-litre carton of milk for $2.27 — the same item cost $3.10 in 2023 and will continue to get more expensive. Investing in a high-yield savings account means you can preserve the value of your dollars.
4 strategies to implement the 50-30-20 rule
Here are four ways to incorporate the 50-30-20 rule into your life:
1. Assess your financial situation
Do you have outstanding debts? Are you paying a mortgage?
Each person has unique money circumstances. Some may be able to save more than 20 per cent because they don’t have any loans. So, look at your current spending and determine if you can apply the 50-30-20 rule without overextending yourself and compromising your needs.
If personal finance feels like punishment, try another method.
2. Set a financial goal
List what you want to achieve with the money in your savings account. Do you want to use it for your child’s university education, fund a dream trip or buy a house?
Owning a home is the ultimate dream of many people, so saving for a down payment is often a priority. If you can afford to pay cash for at least 20 per cent of the home’s sale price, you can generally avoid buying private or lender’s mortgage insurance, which is an additional expense.
The mean price of residential property in Australia in June 2024 was $973,300 — 20 per cent of this is $194,660. If you have two years to save, you must move at least $8110 to your monthly savings account. To achieve this, you can take on a side hustle or get a higher-paying job to pool the required cash.
In a nutshell, identify your goal and create a step-by-step plan.
3. Track and make adjustments
The point of monitoring your spending and savings is to determine where you can be flexible. There will be expensive months when necessities exceed 50 per cent of your income and periods when expenses are lower.
Tracking your finances allows you to decide when to decrease savings because of higher expenses and vice versa.
4. Use mobile apps and online calculators
Try mobile apps like Budget50 which uses the 50-30-20 rule to automatically divide your monthly earnings into needs, wants and savings.
Alternatively, you can use an online calculator. Enter your monthly income, and you’ll instantly get an estimated allocation for three categories.
A guideline, not a hard and fast rule
The 50-30-20 rule is an optimisable guide, not a policy set in stone. People’s priorities are as varied as their needs and wants. Some are motivated to invest to fund their future retirement, while others do it for different reasons.
Personalise the strategy to fit your existing financial circumstance and goals. If the 50-30-20 rule doesn’t apply because of a larger expense, make up for the deficit in your next payday.
Although maximising savings to 20 per cent is recommended, you can be flexible with your budget.
Tips to increase your savings
Here are some tips to put more funds into your investments:
- Treat savings as a fixed monthly expense. This way, you won’t have a choice but to pay for them.
- Automate savings: You can set up an automatic payment to route 20 per cent of your paycheck to another bank as soon as your pay comes in.
- Plan your meals and groceries: Food accounts for a large portion of monthly expenses. When shopping, choose seasonal produce, as it’s cheaper than imported options. Here are some more tips on how to save money on groceries.
- Shop once a week: Frequent supermarket trips can increase the tendency to spend more, so keep it to a minimum.
- Limit dining out: Instead, search for recipes and cook your favourite dishes at home at a fraction of the restaurant’s prices.
Use the 50-30-20 rule to manage your money
This money management strategy reminds you that you shouldn’t spend your entire paycheck on ‘wants’ but to keep part of it for future use, such as retirement or emergency funds.
Managing money is a skill that requires practice. Doing it allows you to hone the financial discipline needed to achieve your goals. Give it a shot and see if it works for you.
