Figuring out how to manage your finances every month can be overwhelming. You’ve set aside for your fixed monthly expenses like loan repayment and rent. Now what do you do with what’s left? How much should you save? What’s your budget for food, fun and everything else? What about an emergency fund? It’s obvious that to get through the month, you need a superb budgeting plan. Here’s one we highly recommend: The 50-30-20 rule.
What is the 50-30-20 Rule?
Bankruptcy expert Elizabeth Warren devised the 50-30-20 rule as a simple way to organise your budget. 50 percent of your income should be spent on your needs; 30 percent on your wants, and the remaining 20 percent put away for your savings. Let’s look at each one clearly.
Your needs are your monthly essentials. Everything you absolutely need for survival and that grievously impacts your life. They include your groceries as well as your fixed expenses such as rent, utility bills, the internet, television, cell phone services, car payments, and your health insurance. If you find you are spending more than you should on your needs, there are solutions. You can either reduce your list of wants, or you can downsize your lifestyle. Perhaps move into a smaller home or get a more inexpensive car. You may even need to start using the public transport system or pack lunch from home!
To be clear, your wants do not necessarily include big vacations, weekly manicures, or new leather car seats. They can be regular, basic purchases you make for your enjoyment – a book, a cup of coffee. As much as you feel that you need your wants, the two are very different. Let’s look at a few examples:
You can get a basic amount of clothes from a discount outlet to wear. Shopping for clothes from a well-established brand are wants.
You can wash your car at home with a sponge, soap, water and a vacuum cleaner. Going to a professional car wash is a want.
There are uncountable workout videos you can follow online. You can even go for a walk around the neighbourhood to get your daily exercise in. Do you really need a gym membership? No, it’s a payment you want to make. Remember: Your Netflix account is a want too!
Try to allocate 20 percent of your income to investments and savings for a rainy day. You should have at least three to seven months of emergency savings on hand, in case of an unforeseen event such as a job loss or even a global pandemic! It is also essential that you have some money set aside for your retirement, or to make other financial goals down the road. For instance, owning your dream house or your dream car.
Start budgeting now!
Now that you are clear on the 50-30-20 rule, it’s time to get started! The rule offers some flexibility as you can alter the percentages to fit your lifestyle. You’ll still be taking action to consistently manage your money every month, which is the gist of it.
Here are some tips on how to get going:
Make a plan. Take a look at your previous spending habits and use that as a guide to plan how much you should allocate to each category. If you go over your budget in one of the categories, you can either cut down on your spending in another, or spend less in the following month to make up for it. Overall, your plan allows you to see the adjustments you may have to make to stick to your budget.
Set your goals. After finding out how much money you can set aside, make a list of the financial goals you want to accomplish in the short-term and long-term. Although your goals don’t have to be set in stone, begin identifying the ways you can achieve them.
Track your spending. Note down every cent you spend, from an ice cream cone to your utility bills and beyond. Put all of those in three categories: wants, needs, and savings. It will help you stay under budget.
Photo by Alexander Mils on Unsplash