If your approach to budgeting is simply “money in, money out”, you might find your bank balance looking a little worse for wear by the time payday rolls around.
There’s a better way, and it’s as simple as 50/20/30.
With this method, you treat your after-tax income as 100% and divide it into three clear categories. The idea is to keep your spending within these limits, so no single area takes up more than it should:
50% - fixed costs
This category covers the costs you can’t easily avoid. These are the expenses that keep your life running, such as rent or loan repayments, utilities, groceries, insurance and transport.
It can also include regular commitments like subscriptions or memberships that you rely on. While these may not be strictly necessary for everyone, they’re often part of everyday life and should be accounted for in your budget if they’re ongoing.
As a general guide, aiming to keep your fixed costs at around 50% of your take-home income can help create balance in your budget.
If you map out your spending and find you’re edging over this amount, it may be a good opportunity to review your regular expenses and see where adjustments could be made.
20% - financial goals
Most people have financial goals, even if they’re not always top of mind. These might include paying down debt, building up savings for a car, or working towards a home deposit to move on from renting.
Under the 50/20/30 method, this category is where those goals live. Aiming to put up to 20% of your take-home income towards saving or reducing debt can help you plan for the long term and make steady progress towards your goals.
Using online tools like a savings goal calculator is a great way to monitor your progress and stay motivated while saving.
30% - flexible spending
This final category covers your more flexible spending – the expenses that can change from month to month depending on your lifestyle and priorities. It includes things like dining out, entertainment, hobbies, shopping and other non-essential spending.
Under the 50/20/30 method, this category should make up no more than 30% of your take-home income. You can calculate this amount by subtracting your fixed costs (50%) and financial goals (20%) from your total income, leaving the remainder for flexible spending.
Ready to take the next step?
If you'd like a bit more information on how to set up a personal budget or cut your living costs, our handy How To Guides are just the ticket. And if you're after a high interest savings account, check out our Bonus Saver∞ or Life Saver~ accounts. They’re designed to help you make the most of your savings, while keeping things simple.