When you were making your first budget in step 17, you might have felt it was a bit of a stab in the dark. Maybe you would have appreciated a simple formula that indicated how to allocate your money in a way that would just make it faster and easier to budget. A formula that also ensured you’d work towards you goals. Or maybe you were happy to rely on your own methods but would now like to find out about a general indicator of how much to allocate to each area.
In this step we are going to have a closer look at a very common concept in budgeting, the so-called 50 / 20 / 30 rule. I’d like to think of it as a guideline more than a rule, as depending on your financial position and your goals, your expense patterns change and you might spend more or less in certain categories at certain moments in your life. It is therefore wise to not just adopt but to adapt this guideline and adjust it to your own specific needs and circumstances.
Let’s first look at what the rule is, and then look at how to make the rule work for you and your unique situation. In short, the 50 / 20 / 30 rule recommends the following distribution of your funds when it comes to budgeting:
- 50% for essential costs: your fixed and variable expenses;
- 20% for savings expenses
- 30% for discretionary expenses
Note how the above is the 50 / 20 / 30 guideline, not the 50 / 30 / 20 guideline. Similar to when you did your first budget, it is important to first allocate money to your savings expenses, before assigning your discretionary expenses. Do it the other way round, and you’re likely not setting aside enough money to meet your financial long-term goals.
So, how then will this rule work for you? Based on the 50 / 20 / 30 rule, you are going to work on finding your own ideal distribution that works for you. You will adapt the rule, analyze how things go and with time find the best proportion to allocate your money to the various expense categories. Maybe for you that is 45/ 25 / 30 or 55/ 15 / 40, or maybe it something completely different.
You might find that as you go through some later steps of this mission that you want to re-adjust it. That is absolutely fine. See it as a continuous process that you will keep working on. More time, knowledge and financial changes will require you to keep analyzing and adapting this rule, so don’t try to find your one and only golden ratio that will work for the rest of your life, as there likely isn’t one.
Step 19 – Budget with the 50 / 20 / 30 rule – in detail
- Start this step by looking at the calculations you made in step 9 – 12 regarding your various expenses. An example below:
- fixed expenses: €750
- variable expenses: €550
- savings expenses: €300
- discretionary expenses: €400
- Total expenses = €2000
- Now take the fixed and variable expenses together (€1300) and divide it by the total (€2000) then multiply it with 100%, to work out your essential expenses. Do the same for your savings and discretionary expenses. That gives you the following distribution:
- essential expenses (fixed + variable): 65%
- savings expenses: 15%
- discretionary expenses: 20%
- If you have several months of expenses registered, repeat this for as many full months that you have so you can see how much these numbers fluctuate.
- Now the hard part: make the rule work for you. Of course we know that influencing your fixed expenses is difficult, that your variable expenses might have some but generally not load of room for some control, and that if you save too much on your discretionary expenses, your life might just become a tiny bit too boring, but you are looking for the best short-term and long-term situation.
- Write down what you think would be your ideal distribution of funds, one to work towards to long-term and one that with a bit of effort you can already put in place next month. This is difficult as it is completely up to you to work out the numbers here, but give it a go and know that you will keep adjusting and adapting.
- At the start of next month, when you are ready to make your new budget, take out your pre-determined percentages to ensure you follow your new personal budgeting guideline.
It is amazing what you can achieve once you’ve decided on your own guideline. Finding out that your savings expenses only represent 10% of your total expenses for example, might be a very compelling reason to bump up the amount you have available for your positive expenses.
Of course, bringing your percentages up to your version of the 50 / 20 / 30 rule can be achieved not just by saving somewhere to free up money for something else. It can also be accomplished by increasing your income, meaning you have more money to assign, thereby influencing the percentages.. This my dear friends will be covered later on during the 100 steps mission.