Budget without breaking the bank
A simple formula that can be tweaked to your needs may help you find a fresh approach to money management.
Are you bad at budgeting? Do you need a strategy that enables you to control your personal finances more efficiently?
If so, it may be worth considering the 50/30/20 budgeting plan, which is promoted as a simple, effective method to ensure that your money is working for you.
First popularised by United States Senator Elizabeth Warren and her daughter, Ameila Warren Tyagi, in their book All Your Worth: The Ultimate Lifetime Money Plan, this budgeting strategy has universal appeal, including for older Australians seeking to manage their finances more effectively.
The 50/30/20 budget divides your after-tax income into three categories:
50% for needs: Essentials such as housing, utilities, groceries, transport, and healthcare.
30% for wants: Non-essential expenses, including dining out, entertainment, hobbies, and travel.
20% for savings and debt repayment: This includes retirement savings, emergency funds, and paying off outstanding debts.
This budgeting method is useful for seniors because it offers a clear and straightforward way to manage expenses, ensuring that essential needs are met while still allowing for some discretionary spending.
Adjusting for fixed income: Many seniors live on a fixed income, often from a combination of superannuation, the Age Pension, and savings. The 50% allocation might need to be carefully managed, especially if healthcare costs rise or if you downsize your living arrangements. Regularly reviewing your budget can help ensure you’re not overspending in any category.
Prioritising healthcare: As healthcare becomes a more significant concern with age, it's crucial to consider whether the 50% allocation adequately covers these expenses. This might mean reallocating funds from wants or savings to ensure that insurance premiums, medications, and potential long-term care costs are covered.
Maximising retirement savings: The 20% allocated to savings and debt repayment should focus on ensuring that your retirement savings are sufficient to cover your lifestyle needs as you age. Even in retirement, it’s wise to keep a portion of your budget directed toward saving for future needs, whether it’s unexpected medical expenses or ensuring you have a financial cushion.
Balancing enjoyment and security: The 30% allocated to wants is essential for maintaining quality of life. Whether it’s travel, hobbies, or spending time with family, this part of the budget allows for enjoyment without compromising financial security. As your lifestyle changes, you may find that your wants evolve, leading to adjustments in this category.
Debt management: If you still carry debt into retirement, such as a mortgage or credit card balances, the 20% for savings and debt repayment becomes critical. Prioritise paying off high-interest debt to reduce financial strain. If your debt is manageable, focus on maintaining a healthy savings balance for peace of mind.
The key to budgeting in your senior years is having the flexibility to change your spending as your circumstances change.
A qualified and registered financial advisor can help you tailor the 50/30/20 rule to your specific situation.
Disclaimer: National Seniors is not a financial advisor. You should consider seeking independent legal, financial, taxation or other advice to check how any information provided relates to your unique circumstances.
