Is the 50/30/20 rule possible in your budget?
How much should you spend on what? Let’s look at a few guidelines to help you with your financial planning.
When you first draw up a budget, it can easily feel as if you are at the mercy of your expenses. There are all these bills you have to pay, which can leave you feeling that you have little control over your money. This is not true, and the secret to changing this feeling around is to understand where your money goes. That means keeping track of every cent – quite literally – and using that information to build a budget that will get you to your financial and life goals. Another secret to becoming proactive about your money is to structure your budget into different categories.
The 50:30:20 rule
A structure that most of us have heard about, is the 50:30:20 rule. This means that you spend 50% of your take-home pay on needs, 30% on wants, and putting 20% away as savings. Needs included in the 50% are, for instance, your rent or home loan, vehicle repayments and/or other transport costs, insurance, medical cover, education, electricity, water, rates or levies, essential clothing, groceries, and security. Wants under the 30%-umbrella include eating out, entertaining, buying expensive clothes or other luxuries, funding a hobby, or paying for a DStv subscription. The 20% savings can take different forms. If you have credit card debt, for example, the minimum repayment is a need, but you should use 20% of your income to repay more than the minimum. Some of that 20% should also go into building up an emergency fund and investing in a retirement fund.
The Wealth Chef’s budget categories
A different budget structure is proposed by Ann Wilson, who calls herself the wealth chef. Here is how she suggests you allocate your take-home pay: 10% = investment for retirement. You never touch or spend this money, but simply allow it to grow. 10% = save to spend. This is money you save to spend later on big-ticket items like a car, a deposit on a house, education, or a dream holiday. Part of these savings also goes towards your emergency fund. 10% = personal growth or learning. Ann believes that we have to invest in ourselves. “Education allows you to learn how to create more money, how to keep it, and how to grow it faster,” she says. You can use this 10% to attend a course, buy books, pay an expert for her time – there are many possibilities. 55% = necessities or needs. 10% = fun. Fun is vital for your financial wellbeing. This 10% is for those things that make you feel good and they are important because they put you in a wealthy, or abundance, mindset. And if you are someone who tends to spend too much on fun, curbing it at 10% will help you balance your budget. 5% = contribution. This is money you donate to charity or an organisation that you feel is creating a better world. Remember also that money is not the only way to contribute. If you can’t yet donate 5%, contribute with your time or talents.
How possible are these categories?
Research done by TymeBank shows that 55% of black South Africans are broke three days after payday, mostly because of high debt repayment and living expenses. The bank’s research also shows that only 37% of South Africans have a budget and stick to it – and that is the heart of the problem. For most of us, either the 50:30:20 rule or the wealth chef’s categories will not be possible when we first draw up a budget. But that doesn’t mean it isn’t possible at all. It only means that you have to follow a process:
- Your first job is to understand your current situation. Track your expenses and allocate them to the different budget categories. That will tell you where you currently are.
- Look for ways to scale down where you have to and put some plans in place to help you get there. For instance, paying down your debts will likely be a priority. Experts say you should spend no more than 36% of your income to service debt that funds assets, like a home.
- Set yourself a goal for reaching the budget categories.
- Set yourself financial goals to help keep you motivated.
- Steer clear of ego purchases, such as a flashy car, designer clothes, or a house you can’t actually afford.
You can do it!
Managing our money better is something we can all do. Yes, it takes effort and discipline, but it is also extremely rewarding when you start achieving your goals and realising your dreams. Whether it’s 50:30:20 or the Wealth Chef categories, decide on the budget structure that works for you and start implementing it today.