50/30/20 Budgeting Rule What Is It and How to Use It

[ad_1]

50/30/20 Budgeting Rule What Is It & How to Use It

The 50/30/20 rule (also referred to as the 50/20/30 rule) is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what. 

The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health.

In this post, we’re taking you through the steps of budgeting using the 50/30/20 approach so that you can learn how to set up a budget that’s sustainable, effective, and simple. Use the links below to navigate or read all the way through to absorb all our tips on how to budget using the 50/30/20 method:

What is the 50/30/20 Budgeting Rule?

Popularized by Senator Elizabeth Warren and her daughter, the 50/30/20 budgeting rule–also referred to as the 50/20/30 budgeting rule–divides after-tax income into three different buckets:

• Essentials (50%)
• Wants (30%)
• Savings (20%)

Essentials: 50% of your income

To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage (and, at 50%, it is), but once you consider everything that falls into this category it begins to make a bit more sense.

Your essential expenses are those you would certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include:

• Housing
• Food
• Transportation costs
• Utility bills

The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.

Wants: 30% of your income

The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you’re willing to sacrifice. 

These personal lifestyle expenses include items such as: your cell phone plan, cable bill and trips to the coffee shop. If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for. Other components of this category include gym memberships, weekend trips, and dining out with your friends. Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory. Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.

Savings: 20% of your income

The next step is to dedicate 20% of your take-home pay toward savings. This includes savings plans, retirement accounts, debt payments and rainy-day funds—things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. That’s a bit of an oversimplification, but hopefully you get the gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.

Think of this as your “get ahead” category. Whereas 50% (or less) of your income is the goal for essentials, 20 percent—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.

The term “retirement” might not carry a sense of urgency when you’re only 24 years old, but it certainly will become more pressing in decades to come. Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.

Establishing good habits will last a lifetime. You don’t need a high income to follow the tenets of the 50/30/20 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.

A note of caution, though: Try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else’s. What this plan does is provide a framework for you to work within. Once you review your income and expenses and determine what’s essential and what’s not, only then you can create a budget that helps you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.

Ask Yourself: Why is a 50/30/20 Budget Necessary?

According to Consumer.gov, there are plenty of several reasons why people start a budget:

• To save up for a large expense such as a house, car, or vacation
• Put a security deposit on an apartment
• To reduce spending habits
• To improve credit score 
• To eliminate debt
• To break the paycheck to paycheck cycle

Identifying the reason, you’re budgeting with the 50/30/20 method can help you stay motivated and create a better plan to reach your goal. It’s like the “eye on the prize” mentality. If you’re tempted to splurge, you can use your overarching goal to bring you back to your saving senses. So, ask yourself: why am I starting to budget? What do I want to achieve? 

Additionally, if you’re saving up for something specific, try to determine an exact number so that you can regularly evaluate whether your budget is on track throughout the week, month, or year.

How to Budget with the 50/30/20 Rule

To make the most of this budgeting method, consider following the steps below:

Deep Dive into Your Current Spending Habits

Before implementing a 50/30/20 budget, take a long, hard look in the mirror (or your wallet, rather). We’re talking about analyzing your spending habits. Do you overspend on clothes? Shoes? Food? Drinks? Figuring out your spending vices from the very beginning will help you learn how to use a 50/30/20 budget that effectively cuts spending where you need it most.

Look at your bank and credit card statements over the last few months and see if you can find any common trends. If you find that you’re overspending on going out for food and drinks, produce a plan for how you can avoid this scenario. Cook dinner at home before, have a potluck with friends, find happy hour specials around town. There are plenty of ways to budget and save money without compromising your social life.

Pro Tip: Using Mint’s easy budget categorization, you can identify where you can cut back on unnecessary expenses.

Identify Irregular Large Ticket Expenses in the “Wants” Category

Of course, there are expenses in life that we simply can’t avoid. Maybe you need to make a repair on your vehicle, or you’re putting a down payment on a house in the next six months. Oftentimes these bills are necessary expenses, so you’ll have to factor them into your budget.

When you’re coming up with your 50/30/20 budget, take a moment to look at your calendar so that you can plan for these expenses and adjust your spending in the time before and after you incur the expense.

Add Up All Income

Totaling your income is an important first step when learning how to budget your money using the 50/30/20 rule, but it’s not always as simple as it sounds. Depending on your job, you might have a steady paycheck or one that fluctuates from month to month. If the latter is the case, collect your paychecks from the last six months and find the average income between them. 

Is the 50/30/20 Budget Right for You?

The 50/30/20 budget isn’t the only option. Other popular methods include:

• Zero-sum: The principle of the zero-sum budget is that you must allocate every dollar you earn toward a specific expense, savings account, debt, or disposable income account. This style can help deter unnecessary spending because you’ll know exactly how much you have to spend on what items.   
• Envelope budgeting: Swiping your card left and right is easy—but the envelope method doesn’t let you succumb to this temptation. Rather than using your card to spend, you use a predetermined amount of cash as your spending pool, nothing more.  

Choosing a budgeting style that works for you depends on a variety of factors; there’s no one-size-fits-all approach to budgeting and saving money. That said, the 50/30/20 tends to be a simple yet effective option for getting started on your budgeting journey.

Main Takeaways: How to Budget Using the 50/30/20 Rule

Here are the key tenets of the 50/30/20 rule of budgeting:

• This budget rule is a simple method that can help you reach your financial goals
• This budgeting method stipulates that you spend no more than 50% of your after-tax income on needs
• The remaining after-tax income should be split up between 30% wants or “lifestyle” purchases, and 20% to savings or debt repayment

Mint offers budgeting software and a helpful budgeting calculator that makes it easy to live in accordance with the 50/30/20 rule (or any budget that suits your lifestyle) so that you can live life to its fullest. After spending just a little bit of time determining which of your expenses fall into which category, you can create your very first budget and keep track of it every day. And when your situation undoubtedly changes, Mint lets you adjust, so your budget can change with you.

Sign up for your free account today, build your 50/30/20 budget, and make this the year you build a solid foundation for your future.

[ad_2]

Source link