We all need a financial life under our control. But, sometimes tracking and organizing spending become very tedious. So, the 50/30/20 rule is a simple, comfortable way of breaking down your budget.
Actually, this rule doesn’t involve detail budgeting categories. Senator Elizabeth Warren mentioned the 50/20/30 budget rule in her awesome book “All Your Worth: The Ultimate Lifetime Money Plan.” However, the basic rule is to divide your spending into three categories – 50% on needs, 30% on wants and 20% on savings.
In this article, we will discuss how you can implement the 50/30/20 rule in only four steps. Before that, let me tell you a few more about this exceptional budget rule.
What is the 50/30/20 Rule?
The 50/30/20 rule will help you to build a simple yet effective budget. So, before implementing, understand what type of spending comes in which category.
50% of your income categories for living expenses, i.e. things that necessary for survival. It includes your rent, food, groceries, essential clothes, utilities, health care, transportation for work, education, etc.
30% of your income allowed for this flexible spending category. This category is not absolutely essential. But you want to upgrade your life. It includes dinner and movies out, brand new mobile phone, vacations, the latest electronics gadgets, ultra-high-speed Internet, costly dresses and jewelry, etc.
20% of your earnings should go toward savings and investments. It includes the investments for your financial goals and debt-reduction payments (if you have debt, such as credit card payments).
How to Start a 50/30/20 Rule
Step #1: Analysis of your Income
Firstly, look at your income to determine exactly how much money you take home each month. So, take out all taxes to calculate your real income.
Income taxes will not append to the spending list. But, tax on your car or property will include in your budget.
Meanwhile, if any health insurance payments or retirement contributions deducted every month from in hand amount, then include again to your income-after-taxes. Certainly, we will consider these amounts as savings.
So, if you are an employee with a steady paycheck, your after-tax income calculation will be easy to figure out.
But, if you are a self-employed/freelancer, then your after-tax income equals your gross income. All kind of business-related expenses will include in your spending list.
Step #2: Limit Your Needs
For this category, find out the things that must pay for survival. Start with your monthly financial responsibilities.
According to the 50/30/20 rule you can spend 50% of your in-hand money. So, the things like rent, groceries, electricity bill, phone bill, utilities, essential clothes, medicine, child education, basic transportation, other expenses for your children, expenses for your pets, etc. will be included in this list.
However, the “needs” category does not include items such as HBO, Netflix, expensive car, costly gadgets, etc. These all are a candidate for the want list.
So, starts calculating your budget in any budgeting app or use a spreadsheet. Check what percentage you currently need to take up. If this is over 50%, then sort them according to the importance. Therefore, you can analyze where you could probably cut some expenses to control your budget rule properly.
Step #3: Analyze your Wants list
Wants are the things that are not absolutely essential, but you spend money to make your life more enjoyable. According to the 50/30/20 rule, 30% of your in-hand income should go to this flexible spending category.
Moreover, it includes new handbag, costly accessories, movies out, tickets for sports events, weekend trips, long-awaited vacation trips, the latest electronics gadgets, costly car, subscription, etc.
Additionally, if you have credit card debt, then you can include the monthly payments in the “wants” category.
We must understand that any set of impulsive spending is not good. So, before spending your hard earned money, at least ask once to yourself whether it is necessary or not.
Moreover, before any expensive buying, better to plan for it. How to think? Plan and save with your family every month from the allotted fund for want category.
This type of habit creates a lot of improvements. Firstly, the family will realize that, if they want to buy a big thing, it required effort and patience. Secondly, your kids will learn how to fight with the temptation of immediate gratification.
Step #4: Savings and Debt Analysis
Most importantly, strictly allocate 20% of your in-hand money to savings and investments.
First, you must focus on saving money in the emergency fund. Then, invest for your retirement fund and paying down debt (student loan, home loan, car loan, etc.).
This percentage of money may seem small compared to the others. But, if you’re doing this wisely, then this 20% can add up quickly. Similarly, if you cut down a small portion every month from your wants category, then you can always save more than 20%.
Most importantly, plan your investment from an early age. Also, regardless of what stage of life you are, now set your some short and long-term financial goals. Then, a set priority of completion with your family. So, it will give you a very systematic and realistic approach to your financial goals.
Start investing wisely. There are many ways of investment that give you the best returns. A salaried employee is always looking for returns that offer safety, tax benefits and liquidity. There are lots of ideas in the bucket – Mutual fund SIPs, ELSS, NPS, Fixed deposits, and Stock market investments. Choose according to your risk appetite.
Proper investing allows growing your money over time with the power of compound returns. So, what can be better than this?
In conclusion, when you don’t like detailed budgeting, then the 50/30/20 rule budget is the best approach to keep. But, you must have an association between earning and budgeting. It is never too early, and it is never too late for good choices.
However, 50/30/20 rule is priceless to follow for people who are just going into their first job and doing their first steps into trying to manage their own money.
Actually, it will work for anyone, especially who are struggling to figure out how much they should spend. Of course, you can modify the percentages according to a personal situation and financial goals.
We hope this article will be helpful to you. Please leave your queries in the comment section and let us know your views regarding this post.