To have a sense of wise spending, you must have a strong understanding of financial allocation. It’s the art of dividing your income into three parts: needs, desires, and goals. And since these three are of varying importance, you cannot split your income equally among them, and that is where the 50/30/20 rule comes in.
What is the 50/30/20 rule?
The 50/30/20 rule, as the name indicates, is about allocating 50% of income to needs, 30% to wants, and 20% to savings, future goals, and debt repayments to the authorised money lender. In total, approximately half of your budget, or 50%, should be allocated to needs or expenses such as utility bills, groceries, housing/rent/mortgage payments, health care, etc. In short, these are the things ‘you can’t live without’.
Wants are non-essential things and services that you choose to spend money on, such as your travel budget, outgoing meals, hobby supplies, and subscriptions. These 30% of your spending will meet your secondary essentials.
The remaining 20% of your income or budget is similar to money that should sit still and not be touched because it will cover your future goals. Those 20% can go towards a down payment on a home, retirement funds, an emergency fund, or even paying off debt above the minimum payment.
What are the benefits of implementing the 50/30/20 rule?
Is applying the 50/30/30 plan beneficial to our finances? Of course. The purpose of this rule is to promote balance in people’s financial lives, which is why it is simply designed as user-friendly guidance. Unlike other financial rules that require major savings, the 50/30/20 rule provides a unique opportunity for individuals to satisfy their desires.
How does 50/30/20 apply to your life?
Though the 50/30/20 guideline can undoubtedly assist you in designing a plan that corresponds with common financial goals. However, it must be adjusted to reflect your location’s cost of living as well as the amount and regularity of income that isn’t from regular employment or business.
According to the types of jobs
The 50/30/20 rule may be difficult for freelancers, part-timers, and contractors with unpredictable incomes. The rule’s fixed percentages do not appear in line with months of inconsistent earnings. However, you can still apply the 50/30/20 guidelines, for example, in these cases:
- Whenever money comes in, it must be put into action immediately
Instead of focusing on the total income to determine the percentage of the rule that is received per month, freelancers can allocate the percentage to specific categories. For example, whenever a completed project’s earnings are received, whether at the end of the month or in the middle of the month, the earnings must be entered into the 50/30/20 rule.
- Take a rolling average of income
If you are unsure about using the strategy above or if you do not have time to go back and forth to manage your finances, you can use a rolling average of income over several months to create a predictable budget. This allows for the simple application of the 50/30/20 rule.
- Pass the higher revenue of this month into your needs or goals
Remember that having irregular income provides more flexibility in the wants area. Imagine that at the end of the year, numerous agencies are requesting your artwork, and you make more than you did in previous months. In this scenario, you can increase your discretionary spending or save it for the following month during leaner months to reduce non-essential expenses.
According to the locations
Of course, it may be baffling if we live in a high-cost city such as Singapore. However, remember to adapt the guidelines to your local spending and income levels.
- You can still follow how it works by moving ‘a little’
Singapore’s high cost of living requires individuals to be able to pay for their costly housing prices as well as their basic needs. That is why implementing 50% of the needs will not suffice. Instead, allocate 60% of your income to meet our basic needs, including rent, housing, and mortgages.
- Sacrificing your wants without abandoning your dreams
Yes, the primary should always take priority over the secondary. Your lifestyle determines your wants, and you can adjust them based on your intentions. While 60% of your budget has been spent on basic needs, it is not surprising that you only have 20% left for wants. Have the ‘assembly first, have fun later’ mindset. Think of it as putting off your enjoyment for tomorrow.
Ready to implement the 50/30/20 rule for your financial goals?
Using the 50/30/20 guideline helps people to pay for what they need most while also enjoying discretionary spending and planning for the future in one cup.
However, we understand that if you are struggling financially at the moment, you can go to a reputable financial institution such as R2D Credit, which can assist you by listening to your concerns and ensuring that the loan products you will take cover your needs and are within your means.
