The biggest pain point with managing finances for most people tends to be sticking to your budget. You may notice that some months you have no clue where your money went. In other cases, you constantly have more month than money. A huge part of the problem is the lack of control that you have over your money. In these cases your money is running you, not the other way around. Budgeting doesn’t have to be difficult and if it is for you, then the 50-20-30 rule to budgeting is for you.
This type of budgeting is not specific to any type of person. It’s a guideline but it takes the thought out of how much you need to allocate to what. It’s a simplified approach and as you get more savvy you can switch it up.
50% for Fixed Expenses
The first step in setting up your budget is to calculate your take home pay. After you have this number, 50% of that should be going to your essentials.
Example: You bring home $3500 after taxes. 3500 * 50%= $1,750 (for needs)
This may seem like a lot but our fixed expenses is usually where the bulk of our money goes anyway. Your essentials are the absolute necessities that must be paid. These include housing, food, transportation, etc. Normally, these don’t vary and are the same from month to month.
If you’re finding that you’re overextended, you may want to review your budget and see if there are any expenses you can cut out or reduce. Monthly subscriptions are a good place to start. One problem with determining what falls into this bucket is separating needs from wants. If you can forego the expense, then it is not a need and does not fall into this category.
20% for Financial Goals
The next step is to allocate 20% of your take home pay to your financial goals. To be more specific,this portion of your income should be allocated to debt payoff, savings, emergency fund, retirement savings, etc. These are priority after taking care of your monthly non-negotiables.
Example: You bring home $3500 after taxes. 3500 * 20%= $700 (for savings and debt)
This is normally where confusion may set in so let me be more specific. Your monthly student loan payment should be part of your fixed expenses. However, if you are making additional payments towards a specific loan or two, the additional payments will be fall within this 20% category. Get it? Good! Once you determine what falls into this category, the best way to move forward is to set it and forget it. Automate these payments and savings so that you’re less likely to do something different with the money.
30% for Flexible Spending
Lastly, the portion you were probably waiting for, your “wants.” Being financially responsible isn’t always fun but it’s necessary. In order to have balance, you should be leaving room in your budget for your wants. Categorizing your wants will look differently per person but use these next few expenses as a guideline. From month to month, your desire to eat out, shop, travel, go to happy hour, etc. will fall into this 30%. It’s important to note that what you deem discretionary, for some may be obligatory. Determine what you want out of life and why money is important to you. This will help guide how you manage these three categories.
Example: You bring home $3500 after taxes. 3500 * 30%= $1050 (for wants)
The idea of this rule is to make the task of budgeting easier. It’s also designed to remove the feeling of deprivation. People hear budgeting and want to run away. They assume it means allocating every penny you own to a bill and forgetting about the things you love to do. Balance and knowing when to say no is key.
Have you tried this budget method before? If so, were you successful? If not, what technique do you use?