How the 50-30-20 Budgeting Rule Works

How the 50-30-20 Budgeting Rule Works

Not everyone loves doing the budgeting work, thanks to the complexity the whole process involves. This can even be much complicated if you don’t know how to manage your finances.

However, implementing the 50-30-20 budgeting rule provides you with a clear picture of your budget. It gives you the freedom to record every transaction you partake.

The 50-30-20 is a rule of thumb that offers you guidelines on how you can plan your budget. You’re able to take care of your after-tax budget income.

Look at the steps below and see how this budgeting rule works.

The 50%

50% of your budget should focus on things you cannot live without. They’re your needs. These are bills that you can never ignore if you want to survive. They include basic groceries, electricity and water bills, insurances, transportation, and loan repayments. Your 50% after-income tax must all these necessary expenses.

Take half of your income after taxation to care for these needs. In case you’re using more than 50% of your after-tax income, consider cutting down other expenses. You can move to a cheaper apartment or look for a cheap car.  Just ensure your needs don’t exceed 50% of your income after taxation.

Reevaluate your budget and make immediate changes in your expenses to ensure you bring your costs down. Even if it means making your lunch at home and carrying it to the office, don’t hesitate.

The 30%

The next 30% focuses much on human wants. These are the nice or luxury things you intend to spend your after-tax income on. These wants include dining out, cable subscriptions such Netflix and Hulu. Buying new and luxurious things such as electronics, shoes, expensive clothes, and handbags are also luxury.

Without these wants, you can still survive and live happily as you maintain your financial wellbeing. Cutting down such expenses is one of the tips on effective personal finance management and planning. Nonetheless, there’re many substitutes for wants available at a very lower price or even nothing compared to what you desire.

You can work out at home instead of signing up for a gym, which might cost your budget. You can also avoid desiring the latest models in the market like phones and shoes that you can buy the earlier versions and still get the same benefits.

Why do you want a Mercedes Benz yet you can afford a decent Toyota car? Don’t cause mayhem in your budget for things you can avoid.

Savings Covers 20%

This is the most important category if you want to secure a great future. Any money market investment and an emergency fund that you have are generally your savings.

Any cash you set aside to bring you income is an investment. You can set up a retirement account, participate in a real estate business, or invest in the stock market.

It would be best to focus on the emergency fund when it comes to this category. After that, check on your retirement savings. Savings also help in repaying debts.