Budgeting can be difficult especially if cost of living increases and our expenses seem to increase more quickly than our income.
Despite that, budgeting is important for our finances and cash flow. Utilising formulas can give us a plan to stick with and help us instill a level of discipline into our monthly spending. As formulas go, keeping it simple can often be the most rewarding route.
In that sense, one“budgeting strategy” that we can use is the “40:30:20:10 rule”. Let’s have a look at what the rule is and how it still works today.
What Is The 40:30:20:10 Rule?
Put simply, this rule splits up your monthly take-home pay into four buckets, with a dedicated percentage in each. It’s important to remember that this budget should be drawn up based on after-tax income, which is what you estimate you bring home after you’ve deducted the impact of income tax.
- 40% for your needs (essential living expenses, such as food and rent)
- 30% for your wants (lifestyle and discretionary spending, such as eating out and travel)
- 20% for your savings and investments (either through building an emergency fund, saving for a life goal, or investing for your future retirement) and;
- 10% for charitable giving or debt repayments
The above percentage breakdown between the savings/investments and giving/debt repayments portions can be reversed (i.e. 20% for the latter and 10% for the former).
That’s because, while saving and investing is certainly crucial, prioritising high-interest debt repayments might make more fiscal sense in the short term for individuals who are in debt – particularly credit card debt.
Essential Needs
This part of the foundation of your monthly budget and these expenses are essential for day-to-day living. In other words, they’re non-negotiable costs that you have to bear. Besides the obvious of food and rental/mortgage costs, they also include utilities, transport, insurance premiums and childcare/school fees.
With the high cost of living in Singapore, it might seem a stretch to only put 40% towards our needs but keeping it at this level can make us challenge preconceived notions of what actually is necessary in our monthly spending.
If this bucket is taking up close to 50% or more of your income, then it could be an opportunity to reassess your fixed commitments or explore ways of boosting your income.
Wants
We earn money to provide and put food on the table but we also want to enjoy life as well. This is where this category comes in.
This is about what brings you joy, whether it be hobbies or leisure activities. This bucket can be dedicated to activities such as dining out, entertainment subscriptions (Netflix, Spotify etc.), shopping, travel or electronic goods.
By setting a solid 30% of your take-home pay for this, the rule allows individuals to budget more sustainably and enjoy life without feeling constantly deprived of joy.
Savings & Investments
The start of your financial wellness journey begins here as this bucket goes towards building your long-term wealth and financial security.
In this category, individuals can count emergency fund contributions, voluntary retirement schemes such as the Supplementary Retirement Scheme (SRS), investments in stocks/ETFs, and savings goals for big purchases – like a home purchase, home renovations or a wedding.
By contributing towards this category, we can start living beyond the “pay cheque to pay cheque” life. Starting small, doing it consistently, and automating it are all more important than contributing a massive amount from the get-go.
By establishing an emergency fund first, we have a better foundation to invest without limitations so that’s how we should approach this bucket.
Giving & Debt Repayments
The final 10% of your take-home pay can go towards various causes based on your own personal circumstances.
If you’re debt-free and financially stable then you can put this portion of capital towards “giving”, as this has been proven to increase personal happiness and creates a sense of abundance,.
However, if you have debt, you should prioritise paying this off as credit card debts can snowball fast. Once you’ve cleared your debts, you can then reallocate this towards giving or maybe even increasing your savings portion.
Why The 40:30:20:10 Rule Still Works Today
The 40:30:20:10 budgeting rule is not necessarily a rigid formula and that’s one big reason for its everlasting success and appeal. It’s more of a financial compass that can guide our financial decisions on a month-to-month basis.
Whether we’re in our early 20s and just started our career, or in our late 40s with children, this rule is a more individual-centred way of managing money that can be calibrated to your circumstances.
