Back to basic money management: The 50-30-20 budget rule
Why is budgeting important?
Just as how you would plan out your career path or holiday plans, budgeting helps you map out how to spend your hard earned cash. Managing your money with a comprehensive plan allows you to anticipate how your wealth will look like three, five, or ten years down the road.
By allocating an amount of cash for various types of expenditure, you can avoid overspending or underspending. Tracking your spending patterns also helps you to spot wasteful spending habits and work towards eliminating them.
What is the 50-30-20 budget rule?
If you are new to budgeting, the 50-30-20 rule is a good place to start categorising out your finances. This rule suggests you to put 50%, 30% and 20% of your monthly income into needs, wants and savings respectively.
Needs include your utility bills, rent, groceries, and other necessities. Wants, on the other hand, refer to expenditure on items that you can live comfortably without such as an impulse luxury bag purchase or an unnecessarily fancy dinner. Savings are money set aside for future use such as emergencies as in the case of emergency funds, or to achieve goals such as an early retirement.
Budgeting involves allocating your income.
Allocating your monthly income in this manner instils a sense of awareness about how you spend your money. This way, you can better discipline yourself into following a preferred financial habit. Take for instance that you have already spent 30% of your income on wants, but is still tempted to purchase the newly launched sports shoes or go on a grand cruise tour. This is when you need to make a judgement call and stop yourself from splurging unnecessarily.
It is even more motivating if you have set some goals for what to do with your savings. Are you willing to compromise on your long-term goal of an early retirement just to indulge in a short-term want? These questions can steer you back on the right money management track.
What if 50-30-20 does not work for me?
The budgeting guideline simply serves as a general point of reference. It may not work for young parents who need to spend more on necessities for a new family member addition, and it may not be suitable if you just received your bonus and would prefer to save it instead.
However, the 50-30-20 rule gives you a starting point to determine how your own budget rule can look like. Regardless, the aim is to spend less on the unimportant, and try to focus on your needs and savings instead.
Some people may find the three categories difficult to work with as well. In this case, you can create multiple sub-categories under each of them. For example, instead of just ‘needs’, you can further break it down to ‘education for my child’, ‘home loan mortgage repayment’, ‘grocery shopping’, ‘utility bill’, and so on. Instead of a big bucket item labelled as ‘wants’, you can specify it as a ‘candlelit dinner at restaurant A’, ‘stand up paddle experience at Sentosa’, ‘hotel staycation at Orchard Road’ and more.
Budgeting requires you to save up dilligently.
Needless to say, the definition of a need and a want can get blurry sometimes. It is important to exercise good self-discipline for the budget rule to work.
What are the steps to budgeting?
Here are four simple steps to sticking by the 50-30-20 budget rule.
1. Determine your monthly income.
This includes your take home salary, which is 80% of your basic salary for most Singaporeans, as well as other income streams from all side hustles and investments.
2. Calculate the monthly income for needs, wants and savings.
Split the monthly income into three brackets, namely needs (50%), wants (30%) and savings (20%). It is advisable to have roughly three to six times of your monthly expenses saved in an emergency fund first before doing this budgeting exercise.
3. Track your monthly expenditure and savings.
You may even use an app to facilitate this process. Recognising that some months can differ greatly from others is crucial too. For instance, if you are paying all your annual insurance premiums this month, your spending on needs will shoot up.
4. Follow through.
Follow the budget that you have allocated for yourself and do not be afraid to tweak it based on life milestone changes such as a large salary increment or after making a home purchase. Arguably the hardest step, following through will help you achieve your long-term financial goals.
Is there an allocation that is better suited for me than 50-30-20?
If you are unsure of the right budget for your ideal lifestyle, reach out to our financial advisors at Life First Advisory (LFA). Not only are we able to guide you on your spending and saving patterns, LFA can also map out the appropriate investments to increase your level of passive income to better reach your life goals.