50/30/20 budget rule

Have you heard of the 50/30/20 rule to organize your monthly budget?

The 50/30/20 rule was made famous by U.S. Senator, author, and Harvard bankruptcy expert, Elizabeth Warren who decided to share her insight into spending and saving with her daughter and then the world. Her book, which was co-authored by her daughter, “All Your Worth: The Ultimate Lifetime Money Plan”, breaks down the 50/30/20 rule to organise your budget.

What exactly is the 50/30/20 budget rule?

The 50/30/20 rule is a guide to making the most of your income by budgeting your money correctly. The rule shows you how to prioritise your income. This rule is one of the best budgeting tips out there, and here’s how to use it!

Split your income with 50% going to your needs, 30% going to wants and 20% going to savings and debt repayments.

Calculate your net income

This means that you should take your gross income (income before deductions) and subtract your tax, and all other deductions listed on your payslip.

For example, if you’re earning R 12 000 and your PAYE (pay-as-you-earn) comes to R1000, your UIF comes to R150 and your Skills Development Levy (SDL) comes to R100, then this is what your net income would be:

R150 (UIF) + R100 (SDL) = R250

R12 000 (gross income) – R250 (deductions) = R11 750

Therefore, your net income is R11 750

Next, limit your needs to 50% of your net income

Your needs would be all the accounts that you absolutely need to pay. These include your rent, or bond repayments, medical aid, insurance, vehicle financing, groceries, electricity, etc. If you’re having trouble distinguishing your needs from your wants, think about if you don’t spend money on that particular account, would it negatively impact your life?

Limit your wants to 30% of your income

Your wants constitutes everything that is not essential in your life. This includes getting takeaways for lunch, instead of packing in some leftovers, buying your daily dose of caffeine, that new Adidas that was just released, etc. Your wants are the things that might make life a little bit more pleasant or convenient, but in actual fact, you could go without it.

Spend 20% of your income on savings and debt repayments

Set aside 20% of your income to savings, investments and debt repayments. Remember that minimum payments are part of the needs category, while everything more than the minimum instalment will fall into this category.

If you are unable to initiate the 50/30/20 rule because your money is too tight, leave your details in our contact form and we will give you a FREE callback!