Our guideline breaks your budget down into three buckets (rather than the seemingly infinite categories of some traditional budgeting). It’s designed to help you figure out how much you may want to allocate to each area every month, and can also help you determine the order in which your money can be allocated.
50/20/30 Broken Down
1. Fixed Costs
These are bills and expenses that don’t vary much from month to month, like rent or mortgage payments, utilities and car payments. We also include subscriptions, such as gym memberships and Netflix accounts, in fixed costs because you’re committed to paying them on a monthly basis.
When it comes to fixed costs, we generally suggest that you aim to keep your monthly total no more than 50% of your take-home pay.
2. Financial Goals
Many financial experts recommend putting at least 20% of your take-home pay toward important payments or contributions that will help you secure your financial foundation. We believe there are three essential goals everyone should strive for: paying down credit card debt, saving for retirement, and building an emergency fund. But your financial goals can also include larger savings priorities, like a down payment on a new home.
3. Flexible Spending
Finally, consider budgeting no more than 30% of your take-home pay toward flexible spending. These are day-to-day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies, entertainment, or gas.
We include groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some weeks you might eat out more, while others you may buy more groceries to cook at home. Many experts often say that it doesn’t really matter what you spend your money on each month in this category, as long as you're aware of your spending and not going over your total flex budget each month.
One Note About Retirement
As you might have noticed, the 50/20/30 guideline applies only to take-home pay. Any contributions you make to retirement before your pay hits your bank account are not included. For that reason, you may actually be contributing more toward your financial goals than this breakdown would suggest. And you may find that it's a good thing to keep that retirement money out of sight, out of mind!
Article originally appeared at https://yourfinancialwellness.com.au/. Find out more about Your financial wellness and get financially fit today.
Any advice given is of a general nature only and does not take into consideration your personal circumstances. Please consider the appropriateness of the advice before acting.