I always look forward to receiving my pay each month because I have various uses for it, I have my regular savings plan, cash savings, allowance for my mother, bill payments and my expenditure, having an allocation system definitely helps. So today i will talking about the 50/30/20 allocation method. So, some background on it, the 50/30/20 budget was made famous by Elizabeth Warren, what it is essentially is to divide up your after-tax income into various percentages namely into 50%, 30% and 20%.
50% needs: As the word needs suggest, these are for payments that you require to survive for example, for a roof over your head, you need to pay your mortgages or rent. Bills like insurance payments and utilities are also some of the needs.
50% is a pretty huge portion of your salary and should be sufficient to cover, if you realised that it is not enough to cover your rent and insurance payments then you might need to re-look on your insurance plans or rent as they might be too huge. Unless you can increase your salary to cover up more of it.
Food and groceries are also part of this portion but definitely the basic ones eg, food at the hawker and not food at high end restaurants as that will definitely fall into the category of wants as you can make a choice between eating at the hawker to satisfy your basic survival needs or to spend extra at a restaurant for it's ambience and better service.
30% wants: This includes non-essential items, not needed for survival but they make living a happier thing. Examples like Netflix, Spotify, branded items (clothes/bags/shoes) and restaurant meals.
Some people cut down extreme on this just so that they can save more or invest depending on how you like your lifestyle to be, there can be adjustments made to it.
20% savings: This 20% also includes investments but I recommend to build up your savings first if you are a fresh grad or have any big ticket item and require liquid funds in the short term. You might require a largest cash balance on your side. Remember that investing carries an amount of risks so read up before investing and try not to be too emotionally invested.
Saving is really important because in the long term, saving is what is going to be helping you reach your financial goals or retirement. You can watch my previous video where I talked about the 5 ways I use to save more money.
Read/watch: 5 Tips on how I save more money
Investing after you have set aside your savings/emergency funds is important because you do want your money to be working for you example, earning a higher interest or growing. Thats why it is important to get started as compounding interest can make a huge difference.
Read/Watch: Compounding Interest - How it can make you a millionaire
What Is the 50/20/30 Budget Rule?
Having an allocation set up is great because you know how much of your salary is meant for what and you can start to automate your budget based on the allocation amount/percentage.
Once you have done that for awhile, you can adjust the proportion according to how you feel will benefit you better.
Definitely, the priority is to build up an emergency fund first. If you want to know more about what an emergency fund is, I did a video previously on it. You can click the top or in the description box below. After you have build up your emergency fund, adjustments can be made to allow some amount of money to be invested. What we want to achieve is to have an allocation first to achieve some basics buffer before moving on to riskier items that can make you money grow faster over the long term.
Thanks for staying till the end! It really helps me knowing that there are people out there watching my videos, I hope it has been informative for you and if so, do hit the like button and subscribe to my channel!
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