CFO of Life #79: Couples Budgeting Made Easy: The 50/30/20 Rule for Your Forever Life

As the old saying goes “What is not measured can’t be managed” and that applies to all aspects of life.

Budgeting isn’t much different! While it is easy to make a budget for one, doing it as a couple is a bit more complicated. The two people have their own separate needs, wants and bills to pay.

But don't be put off by the complexity, it is only there while you set up everything and until you learn to keep up with your budget. At the same time, the uniqueness of the situation dictates that we can't predict everything, but we can be prepared for it.

To start, the type of budget that you need depends on how you approach the even more delicate question of how you combine your finances. (More on that here )

And to make it all easier, this week I will teach you all about the 50/30/20 budget. It works in any situation that you might fall in, all you need to do is adjust it to your liking.

I like the 50/30/20 budgeting approach because it is quite prescriptive, but also extremely descriptive. It gives you some boundaries, but also gives you all the flexibility you need to make it work for yourself.

All you need to remember is that roughly:

50% of your income should cover your basic needs

30% should cover your wants

And the final 20% should cover you!

While this is a simplification, it is enough to show you what you need to consider. Now you know me, and you know that I can’t miss the chance to go into the details, so let’s properly break down each of those categories.

Needs (50% of your budget):

This covers all the essentials you need to support your life, and it should cover all your basic needs like Rent/ Mortgage, Bills/ Utilities, phone bills/ subscriptions, groceries and transportation costs. And here is how much each one of those should be as % of the overall budget:

Rent or Mortgage should be around 25-35%, remember this is a guideline and it would depend on where you live and how much you make, but this is your biggest expense so be careful with it!

Bills/Utilities should be no more than 5-10%, but I know that they would vary a lot depending on your home size, the habits you have and the seasons.

Groceries are a highly controversial topic, but they should be 5 to 15% of your budget. And I know, this would be different for each family based on how many of you there are, what your dietary restrictions are and your eating habits. But be careful and don’t underspend as food is the fuel for your life and it is worth splurging a bit for better food!

Transportation Costs should not be more than 10% of your monthly budget! This includes all your spending on your car(s), public transportation, taxis and car maintenance. Now, in some instances, it might go over that, but that is understandable, in general, there is no reason why you should be spending so much on public transport (given that you have a decent salary).

Phone Bills and Subscriptions are simple - No more than 5%! If you pay more than that, then something is wrong! And don’t try to convince me you need them, just go cut the ones you don’t use and save your money.

While your needs are a huge % of your budget, your wants are a non-negotiable minimum of 30% as you need to treat yourself, enjoy life, to travel, to see the world and experience joy and happiness. Because if we don’t spend our money to enjoy life, then why are we even living?

Wants (at least 30%):

This would cover your travel, personal care, entertainment, events, self-care, gifts, hobbies and anything that makes life fun! This is where you can be creative and have fun, but keep it within boundaries!

The 3 big categories you need to consider here are:

Entertainment - Dining out, movies, hobbies, subscriptions, etc.

Clothing and Personal Care - Skincare, clothes, massages, therapy or anything you need to make yourself feel better.

Travel and Vacations - Anything related to travel for fun and vacationing.

While those categories don’t have a %, you should try and keep all of them together to at least 30%. But if your budget allows, you can go over that.

At the same time, you should not budge your Savings, Investments and Debt Repayments. That is your must-have category.

Savings, Investments and Debt Repayments or (SID) should be a minimum of 20%:

It is simple and non-negotiable, you need to have 20% of your budget going towards savings and investments, even if that is $20 a month. If you can’t do so, it is time for some serious review of your expenses!

To help with deciding what should be your priority, I will put the categories in the way I prioritise them.

Now, there are a few things that go into this category, and they would vary in %. If you add up all of them, they would go way above 20%, but you should not contribute to all of them at the same time. I will address that in a bit.

Emergency Fund (10%) - This is to cover 3 to 6 months of your living expenses. It is what will keep you afloat if time gets tough. But in good times, it is the thing that will allow you to sleep well!

Investments (minimum of 10%) - Once you have an emergency fund set up, you can start investing towards your long-term goals and retirement. Don’t forget that the sooner you start, the more compounding you will experience!

Debt Repayment (minimum of 5%) - Regardless of what kind of debt you have, you should do your best to keep up with the repayments. Now if you have high-interest debt as credit cards or payday loans, you should prioritise repaying it before anything else. And for low-interest-rate debt, you should do your best to keep repaying it as it would otherwise pile up.

Now you easily see that those 3 combined go way above 20%, let me give you my two cents on how to approach this and what is a good way of thinking about your priorities when it comes to this category.

First, you should focus on your high-interest debt (anything above 10% interest rate) and make sure you repay it. An example, SID should be 15% debt repayment and 5% emergency fund.

If you have low-interest-rate debt and some emergency funds, then you are in a good place. An example SID for you should be 10% investments, 5% to continue funding your emergency fund and 5% to cover your debt. And if you can stomach it for some time, you can even go to 10% investments and 10% debt repayment.

Now, the ideal situation is that you will have $0 debt and a fully-funded emergency fund so you can go all in on your investments and potentially retire a lot quicker than expected!

As you can see, all categories are not fixed but are recommended to have within those percentages which makes this type of budgeting a lot easier, a lot quicker and a lot more fluid. This allows you to easily see how you can change your budget with the change of your circumstances.

And the beauty of this approach is that it caters to any situation you may face! Regardless if you and your partner have all your money together, regardless if you have two income streams or you have one, it will still work. Even if both of you are not working and receive pensions or dividends, you can still use this to manage your finances.?

That is the beauty of the 50/30/20 approach, it is nice, simple and easy to use. All you need is a bit of time and patience with the process.

Next week, we will cover the topic of how to communicate about debt with your partner! It is not the easiest topic, but it has to be done. It has to be covered to minimise any future “surprises”. Plus, debt has the nasty habit of piling up and quickly growing out of proportion, but there are plenty of ways to conquer it! All that and more next week in the CFO of Life.

Thank you for reading! All comments and topic suggestions are highly appreciated. Post #79 in the series CFO of Life #si #personalfinance #CFOofLife