Does the 50/30/20 Rule Really Work?

If you’ve ventured online to get some budgeting tips, no doubt you would’ve come across the 50/30/20 method.

Put simply, this method allocates 50% income to your needs such as rent and utilities (after tax), 30% to your wants like entertainment and dining and the remaining 20% to your savings.

The major benefit of this structure is its simplicity as it’s quite easy to set up and follow, but is it really the best way forward to save for a house deposit?

The Challenges:

1. It Doesn’t Consider Your Personal; Circumstances:
If you’re a low income earner, you may not be in a position to allocate 50% to your needs. Specifically during times of high inflation, the cost of living can be astronomical which may require you to spend more than this on bills, making this method unsustainable for your personal circumstances.

2. It Encourages Unnecessary Spending Among Higher Income Earners:
For the higher income earners it can be very easy to allocate the 70% of post tax income to needs and savings, meaning that remaining 30% for wants is significant and often results in wastage. Just because you’ve allocated 30% to your wants doesn’t mean you should spend it. Furthermore, when you receive a pay rise, a better idea is to allocate the extra earnings straight to savings, as opposed to adjusting the percentages.

3. It Can Hold You Back:
When it comes to saving for a house deposit, allocating a mere 20% of savings is likely to hold you back. The best way to mitigate this is to sit down and work out exactly how much you need to save and achieve your goal. This includes an understanding of money coming in, money going out, current funds being put towards savings and any debt repayments you may have. If your goal to save for a house deposit is strong enough, then you won’t think twice about increasing your savings contributions beyond 20%. At AllianceCorp, our Investor Express clients are achieving close to 50% savings which is accelerating their financial goals up to three years!*
*In conjunction with Money Coaching and IncomeGen.

4. It Doesn’t Give Your Money A Purpose:
The 50/30/20 rule doesn’t allocate every dollar. If you don’t spend this allocation, where does the rest go? A lot of people prefer to assign every dollar a purpose, which is generally more efficient to make your money work harder for you.

5. It Doesn’t Consider Inflation and Wages:
With current Australian inflation numbers sitting at 6.1% & Europe, the UK and the US even higher, inflation is rapidly increasing the value of the 50% needs allocation, making a negative impact on people’s savings allocation. The only hope for us in maintaining a higher savings rate is wage growth to offset inflation which sits at a mere 2.6% this year, dwarfed by an inflation rate of 6.1%.

So what can you do?

Create your own budget!

Ultimately, a good budget is a tailored budget that is suited to your needs, wants, savings ability, debts, ingoings, outgoings and personal circumstances. While frameworks such as the 50/30/20 rule can be a good guide, they are not an all encompassing framework that can be applied to anyone so it’s crucial to create your own.

To get started, start by:

  • Working out your ‘take home’ income (post tax) so you know exactly what you’ve got to work with.
  • After this, calculate your expenses for ‘needs’ – items such as groceries, rent, utilities, petrol, transport, bills etc and be frugal with this allocation. It may require you to revisit some of your ongoing expenses and look for a better deal.
  • Next, consider your savings goals and time frames. Depending on how soon you want to take a leap into the property market, you will need to allocate a correct and realistic amount of savings to either achieve or surpass these goals. But remember, for every year passed is another year wasted – which can result in a huge opportunity cost so think wisely!
  • Following, work out if there is any excess in your ‘wants’ category. Wants are the last priority within your budget so if you’re serious about smashing your savings goals, you must minimise your discretionary needs.

Lastly, keep track! You can’t effectively manage a budget without monitoring your expenses and staying accountable. By leveraging tools such as the AllianceCorp Wealth Portal and partnering with a Money Coach, you will dramatically increase your ability to fast track results and get into your first investment property sooner rather than later.

For more information on budgeting and AllianceCorp’s Investor Express program, simply fill out the form below.


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