When I was younger and just starting out in my career, I’ll admit that when the money started coming in, I was spending it – covering my bills, setting aside a little for travel, and using the rest on “yours truly”. I wasn’t thinking about tomorrow; I was focused on what I wanted at that moment. Satisfying my wants was initially far more important to me, which is very common when you first start your career and begin making meaningful money.

I clearly remember thinking I would no longer have to hear the words, “We can’t afford it” from my parents, because now I was making the money and had the power to decide what I could and couldn’t afford.

However, one fateful day, when my old Toyota Corolla broke down and needed substantial repairs, I realised just how financially unprepared I was. The only money I had available was what I had set aside for a holiday with friends the following month, and that’s when I learnt some very valuable lessons:

1, My parents were not going to lend me the money, as they wanted me to understand the importance of setting aside money for a rainy day. They also made it clear that the Bank of Mum and Dad had closed when I got a full-time job and moved out.

2, Just because a car has a cheap purchase price does not mean it’s cheap to fix.

3, I was the only one out of all my friends who was not saving part of my paycheque.

That situation gave me the mental shift I needed to start developing a healthier relationship with the money I was making and to become more mindful of how it should be spent.

I became a good budgeter and saver and started making smart investment decisions. However, I was always unsure about the “norm” for budgeting – how much of my salary should go towards bills, how much should be saved, and how much could be spent on fun.

That all changed when I read All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and was introduced to the concept of the 50/30/20 rule.

The 50/30/20 rule is a budgeting approach in which you divide your income into three main categories: needs, wants and savings/debt repayment. The simplicity of this rule makes it an appealing option for those who struggle to allocate funds or are new to the world of budgeting.

Needs

The first component of the rule allocates half your income – 50 per cent – to needs. Needs are essential expenditures, including housing (rent/mortgage), utilities, groceries, transportation, insurance and minimum debt payments. This allocation ensures that you have enough to cover life’s necessities.

Wants

The second segment of the rule dedicates 30 per cent of your income to wants. Wants are non-essential expenses that enhance your quality of life but are not critical for survival.

This category includes entertainment, dining out, holidays, hobbies and luxury purchases. By allowing for discretionary spending, the 50/30/20 rule helps maintain a healthy balance; it prevents the feeling of deprivation that can result from strict budgeting, enabling you to enjoy the fruits of your labour.

Savings and debt repayment

The final 20 per cent of your income is allocated to savings and debt repayment. This includes contributions to pension plans, emergency funds, and investments, as well as any additional payments towards credit card or student-loan debt. Prioritising savings is crucial for building financial security and achieving long-term goals, such as buying a home or retiring comfortably.

Implementing the 50/30/20 rule in your finances might take some effort, but since we’re still in the early part of the year, a few tweaks should set you up to apply the rule effectively.

The first step is to determine your net income – the amount that actually hits your bank account. Next, break down your expenses into the three categories outlined in the rule.

To simplify the process, consider using a spreadsheet or budgeting app to track your spending habits and identify areas where you may be overspending. As you analyse your budget, you may find that certain expenses need adjusting.

For instance, if your needs take up more than 50 per cent of your income, look for ways to minimise those costs – perhaps by refinancing a loan or shopping around for a better mobile phone package. Similarly, if you consistently exceed the 30 per cent allocated for wants, evaluate which purchases you can cut or reduce.

To put it into context, here is an example of a $5,000 net monthly salary broken down by the 50/30/20 rule:

50 per cent for needs: $2,500 (50 per cent of $5,000)

• Housing (40 per cent): $2000 (40 per cent of $5000)

• Utilities (5 per cent): $250

• Groceries (5 per cent): $250

• Transportation (5 per cent): $250

• Insurance (5 per cent): $250

• Minimum debt payments (2 per cent): $100

30 per cent for wants: $1,500 (30 per cent of $5,000)

• Entertainment (10 per cent): $500

• Dining out (10 per cent): $500

• Vacations (5 per cent): $250

• Hobbies (5 per cent): $250

• Luxury purchases (0 per cent): $0

20 per cent for savings and debt repayment: $1,000 (20 per cent of $5,000)

• Emergency fund (10 per cent): $500

• Retirement savings (6 per cent): $300

• Debt repayment (4 per cent): $200

Assumptions

• The salary is $5,000 per month

• The needs category covers essential expenses such as housing, utilities, groceries, transportation, and insurance

• The wants category covers discretionary expenses such as entertainment, dining out, vacations, hobbies, and luxury purchases

• The savings and debt repayment category covers contributions to an emergency fund, retirement savings, and debt repayment

At the end of the day, applying simple money management principles can be an effective way to manage your money long term and save for the future.

• Carla Seely has 24 years of experience in international financial services, wealth management, and insurance. During her career, she has obtained several investment licences through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master’s degree in business and management