Create your budget plan using the 50/30/20 budgeting approach
Once you have made the decision to create a budget, you might want to consider some of the more popular budget methods to help you get started. When you understand the importance of budgeting, you are on your way to improving your financial future. A simple but powerful budgeting approach is the 50-30-20 method which recommends spending 50% of your after-tax income on needs, 30% on wants, while saving the remaining 20% each month.
The 50-30-20 technique is easy to follow and can help you achieve your financial goals by effectively managing your finances. Let’s take a closer look at the difference between needs and wants.
Needs, Wants, and Savings
In the context of budgeting, needs are the items or expenses that are essential to your everyday life. The bills that you can legitimately categorise as ‘needs’ include food, healthcare, transport costs and power bills. Spending on these types of items is necessary for you to eat, get to work and keep the lights on.
Wants, on the other hand, are the expenses that make your life comfortable and more enjoyable but are not essential for survival. In other words, expenditure outside your basic needs. Enjoying a meal at a restaurant, taking a holiday or splashing out on the latest gadget may be things you like to spend money on, but you can certainly live without them.
The 20% savings is the contribution you are making to your future. The money you set aside could be for unexpected emergencies or for longer term investments, and either way, your future self will thank you for it.
Benefits of the 50/30/20 approach
One way to think about creating a budget is to consider it a plan for long term financial health. When looking after our physical health we aim to establish simple habits to build fitness and strength. Financial health works on a similar principle. Establishing good spending and saving habits through budgeting is a great way to build a healthier financial future. The beauty of the 50-30-20 budget lies in its simplicity.
Financial Discipline
The 50-30-20 rule defines spending thresholds and sets a savings target for each month. If too much is being spent on those nice-to-have items (the wants), the 50-30-20 plan will easily identify where to cut back.
Humaniti can help by providing the details on where your money is going each month. When you securely connect your financial accounts, your spending is automatically categorised to help you better understand your spending, and learn where you can save. You’ll be able to quickly identify any areas where you’re spending too much. Our subscriptions feature is just one handy way Humaniti helps you review your ‘wants’ and decide if they stay or go.
Easy-to-follow Approach
Many people associate financial budgeting with complex calculations but the 50-30-20 approach is surprisingly simple. It’s also a great way to immediately tweak your spending habits to get your finances in better shape. When you securely link your accounts using Humaniti’s personal finance and budgeting app, you can easily monitor your spending and redirect funds into savings or expenses as needed.
Flexibility
The 50-30-20 budgeting approach acknowledges that we all have the desire to spend our hard-earned income on items and experiences that make us happy. Living a thrifty lifestyle may be a way to fast track better finances, but it’s important to have an element of flexibility with a budget. When a portion of a budget is allocated to ‘wants’, it can help maintain motivation by making room for fun and living life.
How to create a Budget using the 50/30/20 budgeting approach
There are four basic steps to create a budget based on the 50-30-20 budget approach:
1. Determine your after-tax income
If you are an employee with a regular income, your take-home monthly salary will most probably be your net income, as taxes are deducted by your employer. If you draw income from additional sources, you should also factor in that income. If you are self-employed, your income may be variable. Deduct all business expenses and taxes from your gross income to calculate your after-tax income figure. By doing this for a broader period (quarterly or half-yearly), you can work out an average monthly amount.
2. Allocate your income using the 50/30/20 ratio
After calculating your monthly after-tax income, allocate 50% of that amount to meet your needs including groceries, utilities and rent. Next, allocate 30% on the things you enjoy such as eating out or having a holiday. Finally, put away 20% of your income each month into a savings account. Consider setting up automated transfers to dedicated accounts for needs, wants and savings, aligned to your pay date.
3. Track your expenses
Key to this budgeting method is ensuring you track your expenses so that you don’t breach the limits you set in the previous step. You can use the expense tracking features available in a budgeting app like Humaniti to make that process easier. By employing this method, you can identify areas where you are overspending and make necessary adjustments.
Humaniti offers a Link, Learn and Earn approach: Link your financial accounts so you can monitor your expenses in close to real-time, without relying on guesswork. Learn where you are spending by using the automated insights and dashboard. Earn by taking part in surveys, if you choose to do so, which can boost your income.
4. Ensure you meet your savings target
Another way you can keep your spending within the limit is to prioritise your savings target as soon as your salary is credited into your account. Consider setting up a dedicated savings account with an automatic withdrawal equivalent to 20% of your monthly salary into that account. The set and forget approach will help you avoid the temptation of dipping into your savings during the month, and shift your focus to managing your needs and wants.
Conclusion
Once you understand the 50-30-20 method of budgeting it’s easy to understand why it’s one of the most popular methods. There are no complex calculations and it’s simple to follow.
For anyone who has previously struggled with budgets, this approach may be the one that makes a difference. Consider combining this budgeting technique with a personal finance app like Humaniti to quickly understand your spending, and learn where you can save. Humaniti also offers a range of features that can help take the headache out of managing your finances. By being able to track your net worth, view your income summary, and better understand your super, you will soon be on track to a more informed and ideally brighter financial future.
* Disclaimer – the information in this post is general only and does not constitute financial advice.