While I love a good framework for managing money, there’s a key step a lot of people skip and they really shouldn’t. You need to tweak the system you use, and do it several times. This is to ensure that it fits your income and your dream lifestyle! There’s a “standard” formula that shows up in many money management books, like the 50/30/20 budget, however this rule doesn’t work for everyone on all incomes and doesn’t take your unique circumstances into account.
Why The 50-30-20 Budget Can Get Things Wrong
The 50-30-20 budget rule states that you should spend up to 50% of your money on needs and obligations. These are costs that you absolutely must pay for. The remaining half should be split into two sections – 20% dedicated to savings, and 30% to be spent on things you want but don’t need (discretionary spending).
So half of your income goes to your living costs – such as food and shelter. For an example, we’ll use $100,000 take home pay, so the numbers are easier to read. If you earn an average income of $100,000, then $50,000 goes to rent and groceries, vehicle costs and insurances. 20% of this is $20,000 to save, and then 30% of this is left over as $30,000 as spending on holidays, entertainment, clothing, and tv apps (and much more).
The median income (the most common amount Australians are paid per annum) is only $72,595, which is before tax. If we take away tax of $12,566.50 as per the ATO’s Simple Tax Calculator, most Aussies will receive $60,025.50
| Income | 50% | 30% | 20% |
| $100,000 | $50,000 | $30,000 | $20,000 |
| $60,000 | $30,000 | $18,00 | $12,000 |
Expenses Just Don’t Fit In!
If your rent is $650 per week (the average in cities according to Loans.com.au,) this is $33,800 out of the 50% bucket and there’s $16,200 left over for other necessities if you receive $100,000 after tax. This is $311.50 per week for your bills, electricity, car repayments… and more. If you’re on the median income, your numbers are even more frightening – your rent doesn’t even fit into 50% of your income!
| 50% Amount | Rent | Remainder | Remainder Per Week |
| $50,000 | $33,800 | $16,200 | $311.5 per week |
| $30,000 | $33,800 | -$3,800 | -$73 per week |
And What If You Have a Mortgage?
The average mortgage repayment across Australia is about $3605.93 according to Loans.com.au. If your mortgage is around $900 per week, this is $46,800, and your whole 50% is eaten up by paying off your house – and then there’s all the extra costs of home ownership such as rates, insurances, utilities and furnishings.
And now your discretionary spending (your wants) are limited, because you need to pull money from the other budgets for basics. Apparently family members still need to eat and would like their houses to be comfortable and school to have pens and pencils etc, after all.
There’s not many people who will sell their house just so they can live by a formula from some random budget book.
How About If I Earn LOTS Of Money?
If your income is $300,000, then these percentages are too much.
| Income | 50% | 30% | 20% |
| $300,000 | $150,000 | $90,000 | $60,000 |
If you’re spending $150K on your necessities, this can be a risk. If your circumstances change suddenly, you may find it difficult to change your budget. If you can save $60,000 for savings (or extreme debt reduction) is great – but could you do better? Then $90,000 for wants and desires is lots of fun, but there’s other fun ways to use that money, for example if you could halve your spending and put your savings towards your future.
Stay Engaged With Your Money
The best thing about using any sort of system is that you can tweak it to suit your income and your way of life. Back when we were earning the big bucks, having 30% allocated to discretionary spending was way too much money, and so we had to adjust accordingly. We saved almost half of our income.
Now that we are a one income family, it changes again. Due to the savings we already have, we are only contributing a very small percentage to long term savings, and the rest of the income is for living on.
Your stage of life, your priorities, and your income will determine what you need to put aside for necessities, spending and saving, not some random formula that some guru set up.
If you need help to set up or tweak your current system so that it works for your family, then get in touch, I’d love to help… but, you will have to know where your money is going first!
Next Steps
If you are ready for some deep change with your relationship with your finances, or if the numbers in this post scare you, then please reach out. I run a hub specifically to help people like you – everyday Aussies working to improve their money skills and get help. Where Did My Money Go helps you to track your income, plan for the future, and do it with people in the same stages as you.
Book a chat or sign up for my next Info Session to find out more!
