The 50/30/20 Rule
Are you having trouble saving money? Is your financial strategy blurry with no clear direction? Depending on your level of income and your type of lifestyle, saving money may be quite challenging. It takes a lot of willpower and discipline to spend within your means and save. Following the 50/30/20 budget rule is a great place to start and it will ensure you are using your money in a responsible manner.
STEP 1: FIGURE OUT YOUR INCOME AFTER-TAX
If you are an employee on a salary this is easy. You can look at your last payslip and check what you got paid after tax and Medicare payments etc. If you are self-employed, figure out how much you have been paying yourself over the last year, and deduct the business tax payable. Tax works quite different for businesses compared to employees, so speak to your accountant if you are unsure. If you believe you will earn more or less in the next year adjust accordingly.
STEP 2: HAVE A “NEEDS” LIMIT OF 50% OF YOUR AFTER-TAX INCOME
After you have your after tax income, go through your bank statements and figure out how much you spend on essentials. Things like groceries, rent/ mortgage, health insurance, car expenses and utilities. Now there needs to be some common sense when calculating this figure. Something such as clothing is absolutely necessary, but overspending on designer clothes and shoes is not. If more than 50% of your income is being spent on needs, then you may need to reconsider your situation. Moving to a cheaper suburb or purchasing a fuel efficient car with low maintenance costs are both good starting blocks to reduce ‘needs’ spending.
STEP 3: SPEND A MAXIMUM OF 30% ON “WANTS”
Before you start to think about all the money you can spend at the hair salon, eating at fancy restaurants and overseas holidays, just hold up for one second. “Wants” are anything that is not absolutely essential. Something such as your unlimited data mobile phone plan, a FOXTEL subscription or spoiling yourself with an occasional wine and cheese night would all come under wants. You don’t “need” all that data for your phone, a Pay TV service or a bottle of wine. But, it is nice to indulge within reason every so often, so 30% on “wants” is acceptable.
STEP 4: SPEND 20% ON SAVINGS AND DEBT REPAYMENTS
At least 20% of your after-tax income should be spent on either paying down debts or saving money. However for clarity, things like paying off your credit card balance, mortgage loans and car loans are all considered “needs”. Any additional money spent over the minimum payment required falls into this category. For example if your monthly home loan payments are $1500, that would be considered a need. However, if you put another $500 towards paying off the loan then that part would be considered in this category. Saving money in the bank, putting it towards an emergency fund and additional superannuation payments are obviously included in this category as well, and should be maximised where possible. Use our budgeting software to see how you can maximise your ability to budget for you and your family.
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