Given that managing your money effectively is crucial if you want to enjoy financial security, and weather both economic and personal storms that threaten your survival, it’s always a good idea to review exactly how things are going. You may find that your approach is sound, but you aren’t able to commit to the rules, or you might discover that you really aren’t following a strategy at all and are simply treading water. 

Thankfully, there are a few strategies out there that have proven to be effective for those who want to turn their fortunes around and do their best to manage their money better. One of these is the 50/30/20 budgeting rule, which offers a straightforward framework. 

Before you decide to throw yourself and your budget into this system, let’s take a cursory look at the 50/30/20 rule. This way, you can make an informed decision about how you would like to manage your money. 

Understanding The 50/30/20 Rule 

The 50/30/20 rule divides your post-tax income into three categories. The first and biggest category is for your ‘needs.’ This is where you set aside 50% of your income for your essential expenses, including rent, groceries, utilities, and transport. 

You then portion out 30% of your income and allocate this money to non-essential but desirable items, such as entertainment, dining out, and hobbies. The final (and smallest) category is the 20% that you dedicate towards building up your savings, making investments, and repaying debts. 

Why We Think This Approach Works 

There’s a very good reason why the 50/30/20 method is so popular with so many people, and that’s because it isn’t difficult to do and it’s quite flexible. This strategy provides you with a balanced approach, ensuring that your essential expenses are covered while leaving room for enjoyment and future financial goals.  

In our opinion, this method has the potential to help more people take control of their finances, particularly in an economy where 76% of South Africans report running out of money before payday.  

There Are Challenges To Consider 

It must be said, despite of believing in this strategy, it can be challenging to follow for the majority of South Africans. When you consider the rising cost of living, unexpected expenses, and high debt burdens it becomes understandable why not everyone would find it easy to follow. Possibly this is why it seems that only 37% of South Africans adhere to any sort of budget consistently. In fact, it would appear that only 19% of us draw up a budgeting plan at all.  

For the most part, we would say that what is needed is more financial education from an earlier age. We shouldn’t only discover the need for a budget when we’re already neck-deep in debt and our cards are being declined at the grocery store.  

Make The Rules Work For You 

If you are finding that you aren’t making month-end and that your debt is only growing, don’t discard the idea of budgeting. This is where the 50/30/20 method can really shine, because you can adjust this rule based on your individual circumstances.  

For instance, if your needs exceed 50% of your income, you could decrease the ‘fun’ category (your 30% for wants) until you have increased your income or eliminated your debts. Another example is if you’re finding that your debt isn’t getting any smaller. In this case, you could allocate more of your 30% to these repayments until financial stability is achieved. 

How to implement the 50/30/20 method: 

1. Calculate Your Net Income: Identify your monthly income after taxes to create the base for dividing expenses into the three categories. 

2. Track and Categorise Expenses: Monitor your spending closely over a few months to identify fixed and variable expenses and see where adjustments can be made. 

3. Automate Savings and Debt Payments: Set up automatic transfers for savings and debt repayments so you can clear these in a timely and consistent manner.  

4. Review and Adjust: Your personal finances are dynamic, so it makes sense to reassess your budget to accommodate changes in income or expenses. 

Feeling informed?  

Financial stability is an achievable dream, but it does require some effort and a strategic approach. Potentially, the 50/30/20 budgeting method can bring some much-needed structure with enough flexibility so that you can manage your finances – and balance your current needs with your future goals.  

Why do we like this approach? Because you have more control and can make adjustments in certain situations. We would say that its simplicity makes it an effective tool for achieving long-term financial stability. 

Don’t forget that AA Inform is home to a range of useful financial tools and resources that can assist you along the way, including access our Monthly Personal Budget Calculator, which provides you with an excellent way to keep track of your finances and help you live within your means.