When money is tight and you’re in need of some cash for a vacation, a new handbag, or just working towards a more financially secure future, it’s time to look at your salary and plan your monthly budget.
For those who have experience about making their own budgets, let this article be a refresher.
For those still new to the budgeting game, sit back, relax and take notes.
There dozens of ways to start your own budget. One of those ways that will be covered in this article is known as the 50/30/20 method.
The 50/30/20 Method
The 50/30/20 method is a budgeting approach that helps individuals allocate their income across different spending categories to achieve financial balance.
The method suggests dividing your after-tax income into three main categories: needs, wants, and savings. Here’s a breakdown of each category:
Essential Expenses
This is where you allocate 50% of your income to cover your essential expenses or needs. These are the expenses that are necessary for your basic living requirements. They typically include:
- Rent or mortgage payments
- Utilities (electricity, water, gas)
- Groceries and essential food items
- Transportation costs (car payments, fuel, public transportation)
- Health insurance and medical expenses
- Minimum debt payments (credit cards, loans, etc.)
- Insurance premiums (home, auto, life, etc.)
- The goal is to ensure that you allocate no more than half of your income to meet these essential needs.
Discretionary Expenses
This is where you allocate 30% of your income towards your wants or discretionary (flexible) expenses. These are expenses that are not essential for your survival but add value and enjoyment to your life. Examples of wants include:
- Dining out and entertainment
- Travel and vacations
- Hobbies and recreational activities
- Cable or streaming services
- Personal care and grooming
- Non-essential shopping
This category allows you to have flexibility and enjoy discretionary spending while still maintaining financial stability.
Savings and Financial Goals
This is where you allocate 20% of your income towards savings and financial goals. This portion is dedicated to building financial security, reducing debt, and planning for the future. It includes:
- Emergency savings fund
- Retirement savings (401(k), IRAs)
- Debt repayment (above minimum payments)
- Investments
- Down payment for a house
- Education or professional development
By allocating 20% of your income to savings and financial goals, you prioritise long-term financial well-being and set yourself up for future success.
Here’s how you can start using the 50/30/20 method to plan your monthly budget based on your salary.
Step-by-Step Guide to Budget Planning
Determine your Salary
Sometimes our salary is not exactly the amount you get every month. For instance, companies will automatically cut out your retirement savings and employee protection every month.
You may also have side hustles, freelance gigs or part-time jobs and those need to be accounted for too.
So to get a final amount of your monthly salary, calculate your total monthly income after EPF, SOCSO, taxes and tax deductions (if any).
This will be the amount you have available for budgeting purposes.
Calculate your Budget
Calculate the budgeted amounts for each category based on the percentages you determined in steps 2 and 3.
Multiply your monthly income by 0.5 for essential expenses and 0.3 for discretionary expenses.
For example, if your monthly income is RM4,000, you would allocate RM2,000 for essential expenses and RM1,200 for discretionary expenses.
Calculate your Expenses
Now’s the time to determine your essential and discretionary expenses, and your savings. It helps to collect your financial statements, receipts, bills and other proofs of payment so you can get an accurate representation of your expenses.
Allocate 50% of your monthly income for essential expenses. These are the necessary expenses that you must pay each month, such as rent/mortgage, utilities, groceries, transportation, insurance premiums, minimum debt payments, and any other fixed expenses.
Next, allocate 30% of your monthly income for discretionary expenses. These are the non-essential expenses that enhance your lifestyle but are not critical for your survival.
This category can include dining out, entertainment, hobbies, subscriptions, vacations, and other discretionary spending.
Finally, set aside 20% of your monthly income for savings and financial goals.
This category will help you build an emergency fund, save for retirement, pay off debt faster, or invest for the future. You can divide this percentage based on your specific goals.
For example, you might allocate a certain percentage for an emergency fund, a percentage for retirement savings, and a percentage for other financial goals.
Adjust your Expenses
Compare your calculated budget amounts with your actual expenses in each category.
No matter how meticulous you are with your finances, these won’t usually line up.
Especially where things like discretionary expenses are concerned which fluctuate each month. If necessary, make adjustments by cutting back on certain expenses or finding ways to reduce costs.
The goal is to ensure that your actual expenses align with the allocated budget amounts.
Track your Spending
Keep track of your expenses by recording them regularly. Use a budgeting app, spreadsheet, or even a simple pen and paper to track your spending in each category.
This will help you stay accountable and identify areas where you may need to make further adjustments.
Review and Adjust
Review your budget regularly, ideally on a monthly basis. Assess your progress, identify any areas of overspending, and make necessary adjustments to your budget.
This will help you stay on track and ensure that your financial goals are being met.
Start Budgeting Now, Mums
It’s important to note that the 50/30/20 method is a guideline and can be adjusted to suit your individual circumstances.
If your financial situation requires more focus on debt repayment or saving for a specific goal, you can modify the percentages accordingly.
The key is to find a balance that aligns with your financial priorities and enables you to make progress towards your financial goals.
So don’t be scared and start you budget today mums, for a more sustainable financial future and more money to do what you love!
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