“Budgeting is telling your money where to go instead of wondering where it went” – Dave Ramsey
Budgeting is a vital part of personal finance, helping you track and control your spending. The purpose of the budget isn’t to limit you, but rather to guide you on intentional spending. There are many kinds of budgets, some needlessly complex, but my personal favourite is the 50/30/20 rule. It is simple, applicable to most people and is great for beginners
With the 50/30/20 rule, you will have to take stock of all expenses, and categorize them into Needs and Wants, and allocate a portion of your net income to each category. 50% to cater for your needs, 30% for your wants and 20% for savings and investments.
Having a budget that follows the 50/30/20 rule is a great way to manage your personal finances
1. 20% for savings and investments
This is the most important, yet often ignored aspect of good budgeting. It is within this 20% that you should establish an emergency fund, pay off your debts and set up a nest egg for retirement.
The best way to save and invest is by automating the whole process, set up a savings account with a standing order from your bank so that a portion of your income every month is automatically deposited into your savings account.
After accumulating a sizeable emergency fund, you can now invest the rest in financial instruments that will grow your wealth faster than a savings account, perhaps consider investing in equities and Unit Trusts that you plan to hold for the long term as a retirement fund.
An average person is expected to live more than 20 years after retirement. It is important to create a retirement fund for your golden years when you aren’t earning from work. It is always better to start as soon as you start earning, so as to take advantage of compound interest.
Even if you expect a government pension or benefits from another pension scheme like NSSF, always create your own as it is always prudent to have your future in your own hands.
2. 50% for needs
This includes the most important expenditures you have, those that are necessary for you to maintain a minimum standard of living. Rent, food and groceries, clothes, transport, tuition for children, utility bills like water and electricity.
If you are currently spending more than 50% of your income on needs, this may be an indicator that you are living beyond your means, perhaps you are renting a house you can’t afford. Hard choices will have to be made to cut down on these costs. You may need to move to a cheaper house, perhaps get a roommate to share some of these living expenses.
There is a limit to how much you can cut your living expenses so; the long term plan should be to increase your income or supplement your current income with a side hustle.
3. 30% for wants
Among wants, we’ve got expenditures that improve our quality of life but are not necessary for your survival. Not spending more than 30% on wants will inform the kind of luxuries you should splurge on should you go on that upcountry weekend trip or can you only afford a movie night at home? What you can or can’t afford will depend on how big or small your 30% is.
A good budget should be flexible and allow for changes to suit the changing world you live in. While the 50/30/20 Rule is fantastic for most people, your goal should be to save and invest a bigger portion of your income as your income increases. A high-income earner should strive to invest more than 50% of their income.
What are your thoughts on the 50/30/20 rule? Do you think it’s applicable to today’s economic standing?
Check out: How Much Money Should You Have in Your Emergency Fund?
