Finance

The Easiest Way to Budget

When I talk about ‘Budgets’, I realised the general response is a resounding groan. I’m sure you too probably thought Budgeting meant you would live a restricted life because you had to budget for every single thing – ‘How could I possibly keep that up??‘. Truth is, unless you are running a business (or really anal), you really don’t have to.

That’s why the 50/30/20 Budget rule is arguably one of the most popular budgeting rule of thumb around. It takes the approach of budgeting by large categories rather than by individual item. This promotes more flexibility and it’s a great gateway budgeting rule for beginners, just to get them into the habit of being more mindful with their spending.

Let’s break it down.

So out of your take home income, the rule suggest you break it down to:

  • 50% to be spent on your NEEDS
  • 30% to be spent on your WANTS
  • 20% to be saved

If you earn $5,000 per month, $2,500 is to be spent on your Needs, $1,500 on your Wants and $1,000 goes straight into your savings.

Hence by adopting this budget rule, it’s merely a one time effort to establish what falls under your Needs and your Wants.

a) Needs

These are the expenditures that you have to incur to live; your Essentials. This will vary based on each person’s situation but the typical ones are eg. Rent/Mortgage, Food & Groceries, Utilities, Medical expenses, Insurance payments, Car repayments, Transportation etc.

I have actually seen some articles that classify minimum credit card repayment under Needs and the rest of the statement balance under Wants. IMO, I think the entire statement balance should be under this category because it’s just a good habit to clear your debts timely. The sooner you pay, the faster you get out of debt. By paying only the minimum balance, your outstanding credit card balance grows, and so does the risk of high interest payment IF you forget to pay on a timely basis.

b) Wants

These are your discretionary spending – you don’t need it but you want it (This includes your I-will-die-if-I-dont-have-it-shoes). So largely this is anything under the sun aside from your needs! Be it a night out with your friends, eating out, a holiday trip, a new bag, a new gadget – you name it.

The upside of this budgeting rule is that our ‘Wants’ are factored in as part of the budget. What’s the fun of living if we can’t treat ourselves amirite? So, we need not feel guilty to splurge on ourselves but the key takeaway is within the boundaries set. Want that shoe but don’t have enough budget for it? Maybe get it next month instead. The other side benefit is it trains us to not act on our impulses and champions delayed gratification.

c) Savings

These are monies set aside for your future. Be it for retirement, for a wedding, for a baby or for an emergency.

After you have established a % of your income earmarked for savings, you must never touch it unless it’s an absolute emergency (but you wouldn’t have to if you already had an emergency fund – ah ha!). In all seriousness though, the aim of a budget is to instill discipline in your spending habits and ultimately save more. So, it becomes counterproductive, if you don’t at least honour the % you have already pre-determined. So set a realistic goal and stick to it. For what to do with the savings – you can either save it in a Fixed Deposit, invest in the stock market or alternative investments.

After you have established which expenditures fall into the aforementioned categories, make it a point to track your expenses to measure your progress against what you have budgeted for. Budgeting is merely a planning process, but what matters most is execution!

Some things to consider:

  • The allocation basis is actually more of a guide than a hard and fast rule.
    Perhaps maybe you realised that your needs doesn’t even take up 50% of your income, then it’s up to you whether you’d like to reallocate it to your wants or perhaps boost your % of savings. After all, 20% savings rule is a suggested minimum standard – not the ideal rate. Tailor it to your situation and your long term financial goals.
  • Not all expenditure nicely fits neatly into Needs and Want
    Like Gifts, is this a want or is this a need? What if you had to buy a new laptop cause your laptop broke, is that a need or a want? What I’m trying to say is – don’t be too caught up in its classification when implementing this rule. Once you have established largely what falls under each category then you can adjust as you go.

Personally, my own ball park allocation rule is:

  • 45% Needs
  • 20% Wants
  • 35% savings

This is because I want to save as much as possible for retirement (when I look at how much is needed to retire in this day and age it just freaks me out – need a rude awakening on how important it is to save? just look up a Retirement savings calculator.), so any leftovers go straight to my savings. My guilty pleasure is travelling but with the pandemic, I have no where to go. LOL.

In fact there are many many other budgeting rules out there, but instead of trying to find the absolutely best way to budget, the best thing to do is to just start.

Do you budget? What is your budgeting approach? Let us know in the comments below!

Disclaimer: I’m not a professional financial advisor and this is not financial advice. I’m just sharing based on what I learned in my own journey and I hope it inspires you to learn more too.

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