One of the most common questions I get asked is, “how do I find the perfect budget”. The truth of the matter is, there isn’t a perfect budget nor is there a ‘one-size-fits-all’. You see, a budget is a funny thing. It’s never consistent, nor is it easy and most of the time it’s just too overwhelming to think about. Much like Tinder…not that I’ve ever been on there.
Related: Why, I say Why Not?
After recently coming across an article written by Laura Shin, I struck ‘budget’ gold. The secret to all my future budgets was right under my nose and ye’old cupid had done her (obvi she’s a ‘her’) job. OH. MY. GOD. It’s called the 50/20/30 rule and it’s super simple. Like so simple you could do it while throwing back a cocktail on a Friday.
(A pretend me throwing back a cocktail, see?)
Instead of spending hours pouring over every single trait of your perfect budget and only ever feeling disappointed when you can’t fill them all, the 50/20/30 rule forces us to focus on what really matters. You know, the big things. After all, size does matter and allocating larger lump sums to larger categories (wink) will make a huge difference when it comes to sticking to this model.
Here’s how it works:
50% to spendings
- Calculate your monthly income. For most of us, this will be easy because, well, we get paid monthly. For those who get paid fortnightly, here is a tip – fortnightly pay x 13 / 12. This middle school calculation will get you your monthly income rate.
- Calculate your total expenses (all of them ladies and don’t forget the cheeky Friday night cheese platter after work followed by the equally cheeky uber ride home). Your total expenses should equal less than 50% of your monthly take home salary and should be categorised into 4 main areas – housing, transport, groceries and utilities. Ultimately, the less expenses you have, the more money you have for savings, investments and paying off residual debt. Easy, right?
20% to your smart brain, like, for the future and stuff
Putting money aside for financial goals is stuff made of nightmares. I mean, who really does that? YOU DO! This portion of your salary should be used to save for the big ones like buying a house, putting towards an investment, your super or paying off debt.
(Fancy graph veiled by pretty shocked woman. So creative)
- If you’re finally getting rid of debt sweat that lingers like a long summer, then I suggest you put most, if not all, of this 20% to your debt. I don’t want to harp again, but when you’re making repayments, it’s really important you’re contributing more than the minimum repayment so you’re actually paying off the debt and not just the interest. Remember: Banks are smarter than you, so loans and credit cards are designed to never be paid off. Do a Kate Hudson and be the exception, not the rule. For goodness sake!
- Emergency fund – don’t have one? Get one! Start by adding small increments until you have around $1000 – $2000 at a minimum. The aim is to eventually have 3 months salary available but everyone’s ‘safe’ word or ‘safe’ point is different so yours might be a lot more or a lot less than this. If you don’t have debt and your emergency fund is looking positively plump (the only time plump is a good thing), then you might consider using the 20% towards investing and contributing towards your superannuation. On the other hand, if you can’t possibly imagine putting 20% aside for debt repayments, then start at a lower % and work towards increasing by a few percent each month. You will be surprised at how quickly you can get there.
- Taking the leap and buying a property? My theory is that you can only truly do that if you have paid off all your debt. Sorry to be the bearer of bad news but you may need to focus your attention on debt sweat before looking at saving for your first piece of property.
30% to fun money
We all love play money, because it’s non restrictive and let’s us spend it on the latest Maticevski dress without feeling guilty. OK maybe that’s a bit of an exaggeration but you get my drift. It’s important that these additional expenses, such as going out for meals, movies, parties, fun, fun and more fun are 100% accounted for.
- If you’re paying off debt, then I’m sorry to be a hard a**, but you can’t allocate as much to the fun times. You just can’t, so stop the tears and start paying off! Be smart ladies and keep in mind the longer it takes you to pay off debt + interest, the longer it’s going to take you to invest, buy property and most likely retire. If you’re like me then I’m pretty sure you want to be finishing your working days on a yacht in the Caribbean, not in a smelly office with grey hair and no end in sight (urgh so depressing).
- Really bad at weekly allowances? Try withdrawing your fun money at the start of every week so you can physically see the cash leaving your purse. Sounds weird, but there’s psychology involved…apparently.
- Perhaps you want to buy a larger purchase but your weekly allowance doesn’t cover it – take out $50/week and put it aside for your larger ‘play money’ purchase later on.
All of the above takes time to figure out and I can already hear (yes, hear) the eye rolling, “who does she think she is”, “I don’t have a spare minute to sit on the toilet, let alone make a fancy budget with calculations and sh*t”. And that is noted! But let me ask you this – why will we spend an hour killing ourselves over a Kayla Itsines workout because we’re told we’ll get the dream body but we won’t spend the same amount of time on a budget that could give us the dream life?
Fearless Female Traders
Disclaimer: The information contained in this article is of a general nature, and it does not constitute legal, taxation or personal financial advice. In providing this information, I have not taken into account your investment objectives, financial situation or needs.