When it comes to payday, there's the question of where should that money go.
Does it get spent straight away on your rent? Or perhaps it's stored away for a 'rainy day'?
Budgeting can be a great way to ensure that you don't overspend when you get that paycheck, whether it be weekly, fortnightly or even monthly.
One budgeting rule that has become quite popular over the years is the 50/30/20 rule.
If you've heard of the rule but don't know exactly what it means, here is everything you need to know and consider if you're looking to try it this month.
Watch the video above.
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How does the 50/30/20 rule work?
The 50/30/20 rule essentially divides your monthly household income into three categories with a percentage of spending for each.
The rule suggests that a half of your income goes towards things that are considered a 'need'.
These necessities include any bills you need to pay such as rent as well as costs for things like extra repayments, food, transport and childcare.
The next 30 per cent of your income is then suggested to be put towards things that you 'want', whether it be clothes, entertainment or dining out.
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The last 20 per cent of your budget is recommended to be stored away in a savings fund.
The rule makes sure you have that comfortable money buffer in case of a 'rainy day' so you don't have to dive too far into your main funds.
Does the 50/30/20 rule actually work and is it realistic?
The 50/30/20 rule depends on the individual's circ*mstances and personal income.
For it to 'work', it requires keeping yourself accountable and sticking to your budgeting rule.
This might mean that if you overspend in one category in one month, make sure you compensate for overspending in the next month.
To keep yourself 'accountable', there are several measures to take to stay on track of your spending and make sure you are following the 50/30/20 rule each month.
The first is downloading a budgeting app. The app store has many budgeting apps available for both android and iPhone models.
There is also the option to buy a physical budgeting planner if that is more reasonable.
Another good idea to keep on track of your budget and spending is to set up direct debit payments. This can be for your monthly rent or even an allocated amount to go straight into a savings account.
In terms of whether the 50/30/20 rule is realistic, it depends again on the individual's income and certain circ*mstance.
While the budget has a set per cent for each category, if this is unrealistic, these can be modified to meet your income.
For someone who maybe has a higher rent or a student who is paying off loans, there may be the need to allocate more towards the 'needs' category than 50 per cent.
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50/30/20 rule with examples
The 50/30/20 rule applies to any income with the corresponding per cent taken for the needs, wants and savings categories.
For example, if your income is $1000 a week, $500 should go towards your necessities while $300 is spent on wants and $200 stored away in your savings.
For someone who has the same income but pays higher in rent, they may need to modify the rule and change it 60/25/15 or any other necessary combination.
This would look something like $600 for needs, $250 for wants and $150 for savings.
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50/30/20 rule - Do you use gross or net?
The 50/30/20 rule typically uses your after-tax income which is your net income.
This means that your money allocation to the three categories is allocated after taxes.
However, for those that are self-employed, the budget can be done using your gross income.
All this means is that the individual has to consider their taxes when budgeting and dividing their earnings into the separate needs, wants and savings categories.
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Is the 50/30/20 rule right for me?
While many money experts recommend the 50/30/20 rule, it is important to consider if it is right for your personal household situation.
The rule can be great for setting and reaching long term goals by having a set allocation of spending for each month.
It is also a good tool to ensure you had funds saved up in case of emergencies such as unexpected medical bills or losing your job.
The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.
