What is 50 30 20 Budgeting?

50 30 20 provides an excellent balance between enjoying your life now and saving for your future dreams. Creating your monthly budget is a detailed task, but 50 30 20 gives you the big picture. It’s like a compass, helping make sure you’re heading towards your long-term financial goals. First, you work out your expected monthly income, after deduction of taxes. Maybe your only income is from a job. But, if you have any other income streams – a side-hustle, child support, pension, tips – include these too. If your income varies from month to month, take an average.

Let’s assume your monthly after-tax income comes to $3,000. Now you divide that income (on paper) into three pots:

• 50% ($1,500) goes on necessities
• 30% ($900) is for lifestyle treats
• 20% ($600) builds your future wealth

This sets out a rule of thumb, but it may not be your reality now. For example, perhaps you are allocating 0% of your income for future wealth, or 50% to lifestyle treats. Before you look at next month’s budget, figure out your starting point. How much did you spend last month on these three categories: necessities, treats, and future wealth? To help you work this out, let’s take a closer look at these categories. What spending goes into each category?

If you add the 50% on necessities and the 30% on lifestyle treats, you’re spending 80% of your income on ‘today’, leaving 20% for a better tomorrow. The 20% to building your wealth includes early repayment of any debts you have, as well as building savings and investments. If you are already debt-free, you can plough the 20% into investments right away.

Take the 20% as a broad guideline. For example, if you want to clear debts quickly, you may decide to throw everything you can at early repayments. Maybe for a few months, you’ll cut right back on treats just so you can get rid of those debts. Or, if you have a high income, you might be able to allocate 30% or 40% - even more – to savings and investments. 

Regardless of the exact percentage, the key point with 50 30 20 budgeting is that you allocate a decent chunk of your monthly income to improving your finances. That’s the goal.

So, if 20% of your income is to build your future, you have 80% left for today. One of the key recommendations of the ‘All Your Worth’ book is not to be a miser. If you are working all hours just to make ends meet, spending nothing on lifestyle treats, money can feel like a trap. Budgeting for treats is vital.

Let’s take a closer look at the how to distinguish between necessities and treats. Food is good place to start.

You need food to live. But visits to restaurants are a treat. When it comes to grocery shopping, you may want to buy produce certified as organic. Take carrots. If a bag of non-organic carrots is $3, while organic is $4, $3 would go to necessities but the extra $1 to treats. Of course, hardly anyone has the time or desire to going into that level of detail. From a practical viewpoint, just estimate how much you think it would cost to buy sufficient food each month to live – leaving out lifestyle treats. If you reckon the figure to be $500 but your actual spend on groceries is $800, you can allocate $300 to treats. Many items of spending a much simpler.

Necessities include:

• Mortgage or rent (though you might choose to downsize)
• House repairs
• Clothes
• Insurances
• Transport
• Medical
• Minimum debt repayments

Lifestyle treats include:

• Entertainment
• Restaurants
• Holidays
• Designer clothes
• Fast cars

You don’t have to be 100% accurate. Broad brush is near enough.

You may have spotted that the 50% for necessities includes your legal minimum debt repayments. For example, monthly loan instalments or minimums on credit cards. But, if you pay extra towards your loans that falls into the 20% building future wealth.

If your after-tax income is $3,000 and if decide to allocate 20% ($600) to future wealth, should you pay off your debts before you build savings and investments? It’s a personal decision but paying down your debts is a great feeling – and it’s a simple, straightforward, plan. But, before you tackle the debts, build an emergency savings fund – in cash or in an instant-access account. Emergency savings are a vital strategy for dealing with unexpected and unbudgeted bills.

You don’t have to stick rigidly to 50%, 30%, 20%. The exact percentages must make sense to you and your situation. Maybe you have a bigger house than you need, or a large family, or an expensive car. Or perhaps you have a high income or a low income.

But you can still use the 50 30 20 template, setting a goal for allocate a certain percentage of your income each month on the three big categories: Necessities, Lifestyle treats, Future wealth

Personal budgeting is detailed work. 50 30 20 helps you keep the big picture in mind. That's why I recommend you use it in your financial goal-setting.