The 50/20/30 budget, is a proportional guideline for allocating your paycheque. It’s in essence, a system of personal budgeting for keeping your spending in alignment with your savings goals.
Typically, the budgeting process requires you to keep receipts and track every single expenditure. Now, that can be a real drag. And I don’t even think, there’s many people who will be able to do that consistently. Most people tend to just give up and continue to run their personal finances on the fly.
It is here, the 50/20/30 budget comes in, by offering some flexibility. So instead of keep spreadsheets with multiple categories, you can just allocate your paycheque to three categories – Essential Expenses (Needs), Financial Goals (Savings) and Lifestyle Choices (Wants).
The first 50% of your income is allocated to cover essentials expenses such as, rent, mortgage, groceries, transport, telephone, internet and utilities. Prescription medication also fall here. It basically covers the core things you need to live.
The second 20% should go into savings, investment and debt repayment.
The final 30% can then go to things you want but can go without. This covers spending on entertainment, giving, shopping, travelling, eating out and gym membership. It basically covers expenses on things you need for a happier life.
Like every other rule of thumb, this is just a starting point. The percentages can be varied to cater to your personal situation. As such, it’s not about the exact percentage breakdown but about having a framework for allocating your paycheque to create room for your needs, wants and financial goals.
I think the 20% percent allocation to financial goals should be viewed as a minimum while the 50% and 30% allocation to essentials and lifestyle choices should be viewed as maximums.
At the end of the day, the goal is to keep your personal finances simple so you can pay your bills, add to your savings, and have the freedom to use some money just for fun.