Budgets are not just for paying bills on time or meeting your obligations, but also for staying within a predefined limit for spending that you have chosen for each category. By having budgets, you make active, empowering decisions on how you choose to spend your money and to build your life!
The 50/20/30 Rule or Budget can help you keep your spending in check and aligned with saving goals that you have. This simple system can help you achieve a balanced budget that is built around your unique goals, expenses and lifestyle.
Using this method is particularly helpful if you are just starting out or just beginning to actively manage your personal financial habits. It will help you understand and follow budgets more easily, thereby making it easier for you to achieve your financial goals.
50% of Your Income: Essentials
The first part of the rule, 50%, covers the absolute essentials of your life. You do not exceed this amount. The essentials includes everything essential such as your rent or mortgage, utilities, food, transportation, minimum monthly payments for student loans/credit cards/personal loans that you may have. These are the bills that you must pay every month. Each expense is different in amount and will vary by individual.
20% of Your Income: Savings
The second step of the rule is to set aside 20 percent of your pay or income toward savings. This includes any savings plans you have and rainy-day funds. You can also include paying off more of your debt payments that you have beyond the minimum amount included in the 50% category. This second step includes additional savings and funds you have beyond your basic survival.
To enjoy a higher quality of life, you must put aside more money in this category, whether it is paying off your debt or putting aside 3-6 months worth of monthly income. Having retirement savings may not seem that important to you when you are 20, 30 or 40, yet time can pass quickly. The faster you start saving and the younger you are, the more you will reap the benefits later on as interest compounds over time.
30% of Your Income: Personal
Finally, the last category, includes budgeting for your discretionary expenses. This can be luxury items, trips or other expenditures that are not necessary for your day to day existence, but you may want to have. You may wonder why this category is larger than your savings but it includes a lot of items ranging from your cell phone plan, gadgets you use, your cable bill, trips to the coffee shop, dining at restaurants, food deliveries, gym memberships, weekend trips and other expenditures. If you live in an area where you do not need to drive daily, having a car would fit in this category.
Lifestyles and individual needs vary but you have to decide which expenses in this category are essential and obligatory, and which ones are simply personal preferences or status symbols that technically are necessary and often expensive. The more that you are able to cut down on expenses in this category, the more likely you will be able to pay down your debt, build up your savings and truly secure your future.
The 50/20/30 rule offers you a simple way to establish good habits. Whether you have an entry-level job or are pulling in big dollars, you must master good financial habits of budgeting and putting aside regular savings in order to gain financial freedom. You can use this rule for your lifestyle as you wish and adjust each category as necessary.
Only you know what expenses fit into each category – what is essential and what is not – and you can adjust the total expenditure accordingly. Just use the 50/20/30 rule as a framework to begin. Follow these basic principles, pay attention to your monthly expenditure and adjust accordingly. You can use a budgeting software or app to help you monitor progress even daily, thereby helping you gain awareness and build your financial foundation for the future.