In this article we talk about budgeting in general and two different ways of running your own household budget: the 50/20/30 Budget and 60/20/20 Budget. We look at what they are and what your income looks like when split this. Finally, we discuss how budgeting helps you achieve your financial goals sooner.
Getting started on your budget
Before you jump in and implement any budgeting rule or changes to your budget, we’d suggest having a look at what you’re currently spending and making a note of whether they’re needs/essentials, wants or likes. If you’re not sure where your money is going, there’s a lot of different apps you can use (like ASIC’s TrackMySpend) that can help you with this information or you can get an app that syncs in directly with your bank account (or maybe you already have you bank app on your phone which provides this).
Taking the time to go through your income and expenditure is important to being able to categorise your expenses. From there you can determine what is essential and where you might be able to save some money to go towards bigger financial goals. This afford youthe opportunity to make some changes. We’d suggest going back three months to get a good snapshot of your recent spending activity. You are also able capture quarterly things like utilities, but don’t forget to include your big annual expenses too which might include car registration, rates, insurances and that type of things.
Both of the budgets outlined below are based on a percentage of your income going towards certain things, they don’t necessarily take into consideration your actual current spending – rather the suggestion is that you should adjust your spending and expenses to fit in line with ratios outlined.
The 50/20/30 Budgeting Rule
The break down for this budget is 50% on living expenses, 20% on achieving financial goals and 30% on wants or discretionary spending. This budget was created by Harvard Professor and bankruptcy expert Elizabeth Warren.
- 50% of your take-home income is spent on living expenses includes – things like rent/mortgage, groceries, utilities and transportation.
- 20% of your take-home income is put into achieving your financial goals – such as debt reduction, savings and investments.
- 30% of your take-home income is on discretionary spending – this might include entertainment, travel and eating out.
As an example, if you earn $1,000 a week your budget looks like this: $500 towards living expenses, $200 towards savings and pay off debt and $300 towards entertainment, travel and eating out.
The 60/20/20 Budgeting Rule
This is a budgeting rule outlined by the Barefoot Investor Scott Pape. You’ll have to buy his book for the full system, but for a good overview check out The Barefoot Budget here.
Scott suggests 60% of your income on essentials, 20% on your financial goals, and 20% on wants or discretionary spending. These numbers aren’t set in stone, if you spend less on essentials and more on savings then that’s fine. In his recent book he amended this split to 60% on living expenses, 20% on achieving financial goals, 10% on savings and 10% on wants or discretionary spending.
The breakdown for the 60/20/20 budget looks like:
- 60% of your income is on living expenses – rent/mortgage, groceries, utilities and transportation
- 20% of your income on financial goals – debt reduction, emergency fund and investments
- 20% of your income on discretionary spending – entertainment, travel and eating out
Using our $1,000 example above it would mean $600 goes towards essentials and bills, $200 towards savings and debt reduction and 20% on entertainment and “wants”.
Do these budgets work for everyone?
As a general rule, these budgets are a good place to start. What we have found it the higher your income is, the less we find these two budgets make sense. Mainly for the fact that your living expenses are not necessarily going to be 50-60% of your income if you’re earning $10,000,000 per year. Likewise, if you’re earning $25,000 a year you might not be spending 30% of your income on discretionary spending, you might spend more of it on essentials.
If you’ve never budgeted before these two budgets give you the general outline of what you should be spending. If have no interest in tracking every single dollar you earn and spend then you can quite easily set up some automations in your bank based on the figures you calculated above.
Ready to make your budget work for you?
Get in touch with the Entourage team today, we dan assist you in looking at your budget and helping you on your way to home ownership.
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