The 50-20-30 Rule makes budgeting simple so you can pay your bills, add to your savings, and set aside money for fun.
Budgeting isn’t always as complicated as it may seem — this simple formula makes it easy to allocate your money each month.
If you’re new to budgeting, figuring out how to manage your money each month can feel overwhelming. Not only do you need to organize, but you also have to make difficult decisions about how to spend your cash. Relying on the advice from others can help only so much, because your income and expenses are unique. Someone may be able to spend $4,000 per month on rent in Manhattan, NY, but that kind of spending may not work for you.
But there’s good news: You don’t need fancy finance apps on your phone, or complicated spreadsheets with countless spending categories to understand how much you can spend. You simply need to follow the 50-20-30 Rule.
The 50-20-30 Rule helps you build a budget by using three spending categories:
- 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work.
- 20% of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (if you have debt, such as credit card payments).
- 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on movies and travel).
Keep in mind that the percentages for essentials and flexible spending are the maximum you should spend. Falling under those guidelines can leave more money for other financial goals.
Figure out what’s currently happening with your spending habits. First, look at your pay stubs to determine exactly how much money you bring home each month. That’s your income and what you’ll base your 50-20-30 split on. (If you’re self-employed, be careful to track your earnings and understand your average income per month so you can budget accordingly.)
Next, track your spending. Yes, every cent, from the big stuff such as rent, to the coffee that you grab on the way to work. (If you spend most of your income through credit and debit cards, these reports are easy to generate). Each of these should be categorized into the three 50-30-20 buckets mentioned above: essentials, financial goals, and flexible spending. From here, adjust your spending to ensure you’re falling into the 50-20-30 parameters. You may find that you’re overspending on stuff you want but don’t need, and that’s when it’s time to cut back.
This budgeting plan keeps your personal finances simple so you can pay your bills, add to your savings, and have the freedom to use some money just for fun. And for the novice, the 50-20-30 Rule is a great starting point for learning the basics. There’s no uncertainty, your action steps are clear, and it even provides for savings, investments, and other financial goals. This makes it much more likely that you’ll stay the course over time, ultimately reaching your desired financial stability.
The 50-20-30 Rule also offers some flexibility. Do you spend more than 50% of your income on essentials? You can bend it a bit by altering the percentages to make it work better for you.
“It’s not about the exact percentage breakdown, because all budgets will be slightly different,” says Eric Roberge, a financial planner who specializes in helping professionals and entrepreneurs at Beyond Your Hammock. “The key is to take action and use a system to help you stay consistent in managing your money every month, and making sure you’re covering your expenses, being responsible by saving for tomorrow, and giving yourself some room to enjoy life today.”
Posted by Kali Hawlk on Trulia