Spend or save? The 50/30/20 rule
From a young age, we’re taught that saving is a virtue and spending is an excess. But like most absolutes, the truth often lies in all the exceptions to the rule. Here are ways to find “budgeting balance” in a world where everything competes for your money.
For most of us, payday is the relief we look forward to, and debit-order day is the reality we dread. This monthly cycle between “enough” and “not enough” drives a lot of internal anxiety: one moment we feel in control, the next we feel over-extended.
First off, let’s admit that saving is hard in the current economy. With the high increases in the cost of living and multiple interest-rate hikes over the last two years, many households feel immense financial pressure – just ask anyone paying off a home loan or a car how much more costly their debt has become.
But as much as we’re urged to save, we should also appreciate spending is not always the opposite of saving. Spending can even become savings in productive and protective ways, like paying for an education for a future job, or paying an insurance premium to cover a future uncertainty. Even purely discretionary spending, like taking a holiday with friends or paying for a group dinner can be an investment in social capital by strengthening networks and opportunities over time, all of which can pay dividends in the future.
But how do you manage this in the context of a household budget? A useful guideline to follow is the 50/30/20 rule.
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What is the 50/30/20 rule?
The 50/30/20 rule is a balanced budgeting guideline which says to spend 50% of your after-tax income on needs, 30% on wants, and 20% on savings. These ratios are not meant to be hard and fast “rules” but can guide you in differentiating necessary versus discretionary spending. But what does this practically mean? Let’s break it down, starting with savings.
20% | Start with your savings
Saving is essential to protect your future, which is why disposable income should come after you’ve saved, not before. Consider paying yourself first through a monthly debit order to help you create discipline. If you don’t, it’s just too easy to spend more on “wants” than you planned.
It’s important to prioritise your savings strategy so you cover the essentials, like creating a cash buffer, before committing to a longer-term investment lock-in.
READ MORE: When to save and when to invest
50% | Assess needs honestly
Needs are the expenses you must pay to survive, such as rent or home loan repayments, medical aid, groceries, car repayments, school fees, and utility bills.
Using the 50% allocation is especially helpful in deciding what rental bands or car repayment levels are genuinely affordable for you. For example, you may need a car to get to work and back, but it doesn’t need to be a luxury SUV. Similarly, a place to live is a necessity, but it doesn’t need to be a four-bedroom house in a neighbourhood outside your price range.
The key is to self-assess honestly and make a balanced judgment, keeping a full view of your financial life in mind.
30% | Enjoy the wants
Wants are lifestyle choices layered over and above your needs – the things you do for pleasure, leisure and entertainment, like a Netflix subscription, a gym membership, eating out, designer goods, and holidays.
Buying and experiencing the things you love releases dopamine and can psychologically validate the hard work you put into your job. Experiences, in particular, can create powerful memories and connections with others, which research shows make us happier than material purchases.
Some of these moments are best enjoyed when you’re younger – when you can walk a city flat and have it feel like an adventure rather than a hindrance. Spending money in this way often means self-growth and fulfilment – just do it within your budget.
We know finding balance in this area can be overwhelming. But it underscores the value of holistic financial planning, which involves building a plan appropriate to your individual needs with objective advice. If done correctly, you can be well on track with your savings goals and spend without jeopardising your financial future.
LEARN MORE: Saving and investing made simple
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