If your method of budgeting is “money in, money out”, there’s a good chance your account balance is looking a little worse for wear by the time pay-day rolls around.
There’s a better way, and it’s as simple as 50/20/30.
Think of all your post-tax income as 100%. Got it? The 50/20/30 method works when we break down this income into three main percentage categories, and make sure we don’t allocate any more to each category than is necessary:
50% - Fixed Costs
These are the things we can’t get around paying – the essentials. Think home loan repayments, personal loan and car repayments, utilities, etc.
Also fitting into this category are our ongoing payments such as subscriptions and memberships - yes, we class Netflix as essential, but if you feel the need to go to the gym, we guess this counts too. ;)
As a rule, you should try to keep your fixed costs to 50% of your take home income or under.
(If you map out your spending and find that you’re verging over, this may be the best time to re-examine your fixed costs, and see what you could stand to live without.)
20% - Financial Goals
Remember when your parents used to try and get you to save for a rainy day? Turns out, they were onto something.
We all have financial goals, whether we’re aware of them day-to-day or not. You might be trying to consolidate debts or pay down your credit card, or save for a new car, or that housing deposit so you can say goodbye to renting for good.
Whatever the goal, aim to put up to 20% of your take home income towards this category, and you’ll not only be able to better plan your budget long-term, you’ll reach your goal before you know it.
Using online tools like a Savings Goal Calculator is a great way to monitor your progress and stay motivated while saving.
30% - Flexible Spending
Finally, we get to the fun part. This category is for your regular expenses that can vary month on month, depending on what you’re getting up to, but includes things like groceries, shopping, entertainment & hobbies.
This category should account for no more than 30% of your take home income, and should be calculated by subtracting your Fixed Costs (50) and Financial Goals (20) from your total take home income.
That's all well and good, but what does it mean to me?
Ok, good question. So, here’s how to plan your budget based off our example:
Frankie is 22, and a recent uni graduate, now working at her first job. Her take home pay per week (after tax) is $650.
Fixed Costs (50%)
- Rent: $125 (Frankie shares a flat with her 2 friends)
- Transport: $60 (Frankie catches the train to and from work, with the occasional Uber trip on weekends)
- Netflix: $11
- Mobile Plan: $69
- Gym: $50
Total: $315, or 48% or her take home income.
Financial Goals (20%)
Frankie puts aside $120 per week, as she is saving for a new car – this accounts for 18% of her take home pay.
Flexible Spending (30%)
This leaves Frankie with $215 for flexible spending, or 33% of her take home pay.
If you'd like a bit more info on how to set up a personal budget or cut your living costs, our handy How To Guides are just the ticket. They’re full of useful stuff, including our Saving Calculators, and we've laid the processes out for you step by step.
And if you're after a High Interest Savings Account to help your savings grow, why not check out our Bonus Saver or Life Saver Accounts? They've been designed with the thrifty in mind!
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