You may have heard of the 50/30/20 budgeting rule which goes a little something like this:
“50% of your income is for needs, 30% is for your wants, and 20% goes towards savings.”
Although it is a super simple method, it is a flawed budgeting method for several reasons:
- This budgeting rule doesn’t take into account investing: how much goes towards investing?
- This budgeting rule doesn’t consider debt repayment: how much should you be overpaying?
- 30% is a lot for wants: 80% is for your needs and wants, leaving just 20% for everything else.
- 50% is a lot for needs, ideally your needs and wants should make up 50% of your budget.
In this article, we dive into what we call the Mind Your Business Ultimate Budgeting System.
We discuss real life examples, if you budget as an individual or if you budget as a couple.
The intention of this article is to level up your budgeting game in a way that works for you.
The Problem with the 50/30/20 Rule
Before we introduce the new method, we need to identify the problems with the old method.
These are not problems per say, but it is just missing a lot of jobs that your money should do.
Let’s recap: the old method states 50% for your needs. 30% for your wants. 20% for savings.
Let’s say if you’re single, you have a monthly budget of $3,000 and if you’re a couple: $6,000.
For a single person that means: $1,500 towards needs. $900 towards wants. $600 for saving.
This sounds ok, but there’s no money assigned for investing and debt repayment each month.
For couples this means: $3,000 towards needs. $1,800 towards wants. $1,200 towards saving.
Similarly, this is not bad, but again there’s no money given for investing and debt repayment.
There is another way to budget, one that takes into account these 2 very important factors.
This method is by no means easier, but it is more comprehensive for building wealth quicker.
Introducing the MYB Ultimate Budgeting System
Starting with a full pie chat, we start off by splitting it right down the middle: 50% and 50%.
This is because 50% is assigned for General Living and 50% is assigned for Wealth Building.
For General Living, this covers needs and wants. That’s right, 50% for both needs and wants.
So for a single person, their general living budget would be $1,500 for their needs and wants.
For a couple, their General Living budget would be $3,000 for both their needs and wants.
Under Wealth Building, this covers saving, investing, and debt repayment i.e. 50% for all that.
For an individual, their wealth building budget would be $1500 for investing, saving and debt.
For a couple, their wealth building budget would be $3,000 for saving, investing, and debt.
So rather than dividing the pie chart into 3 pieces, you would divide it into 6 pieces instead.
Rather than the 50/30/20 rule, this method would be called the 16/17/17/16/17/17 rule!
Let’s Talk about General Living
General Living is comprised of your Needs (Necessities and Bills) and Wants – let us explain:
- Necessities is essential variable spending: groceries, commuting, etc. i.e. 17% of your budget.
- Bills is essential fixed spending: mortgage/rent, utilities, internet, etc. i.e. 17% of your budget.
- Wants is optional variable spending: eating out, giving, shopping, etc. i.e. 16% of your budget.
So General Living expenses (needs and wants) should equal to 50% of your monthly budget.
For an individual with $1,500 GL budget: $1,000 for needs (necessities & bills). $500 for wants.
But if bills cost $1,000 then have $250 for necessities and $250 for wants. You can be flexible.
For a couple with $3,000 GL budget: $2,000 for needs (necessities & bills). $1,000 for wants.
But if bills cost $2,000 then have $500 for necessities and $500 for wants. You can be flexible.
You can be flexible with General Living expenses as long as it equates to 50% of your budget.
Let’s Talk about Wealth Building
Wealth building is made up of Saving, Investing, and Debt Payments – let’s go through these.
- Saving is money for future spending: holiday, car, emergencies, etc. i.e. 17% of your budget.
- Investing is for buying assets: business, real estate, stock market, etc. i.e. 17% of your budget.
- Debt repayment is for overpayments: credit cards, student loans, etc. i.e. 16% of your budget.
So Wealth Building (saving, investing, debt) should equate to 50% of your monthly budget.
For a person with $1,500 WB budget: $500 to save, $500 to invest, $500 for debt repayments.
This is flexible: you may pay your debt quicker ($1,000) than saving and investing ($250 each).
For a couple with $3000 WB budget: $1000 to save, $1000 to invest, $1000 for debt payment.
Similarly you may want to invest aggressively ($2000) and save and pay debt less ($500 each).
You can be flexible with Wealth Building activities so long as it equals to 50% of your budget.
Why Should I Follow this Method?
At this point you may be thinking: why should I follow this complicated method of budgeting?
The reality is if you want to retire early one day you must focus on your Wealth Building Rate.
This method may seem a bit extreme if you’re used to big expenses for your needs and wants.
But you must get your general living expenses down and your wealth building activities up.
50/50 is a good ratio: you get to enjoy money now as well as put money away for the future.
If your general living expenses is morelike 75% that’s ok; look into reducing it as best you can.
That may be difficult for a single person with one salary, and it will be – but it is not impossible.
For a couple with two salaries: perhaps one salary is for GL expenses and the other is for WB.
This way if one of you were to lose your job, you’d still be able to survive on just one income.
Have a go at implementing the MYB Ultimate Budgeting System and see how you get on!
To find out more about early retirement, check out our articles on retirement and investing.
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