We all want to get a grip on our finances, don't we? To live comfortably and within our means, to make sure we do not constantly end up in debt and possibly have some money left to take into our savings.
So what do we do to try to be sure that we get a good handle on our finances? We create a budget. Budgets provide a true image of what money comes in and how it is spent. But sometimes, creating a budget doesn't mean you already have a good handle on your finances.
Many of us create a budget, and while trying to stick with it, you realize that a certain commodity has been left out. It could be an essential one. Most people, realizing this, may abandon their budget, maybe even throw it out the window, vowing to make a new one the following month.
Understandably, budgeting can be challenging to take on. And if you have no idea where to start when trying to create your budget, you may start with the 50:30:20 budgeting rule. This rule was popularised by US Senator Elizabeth Warren in her 2005 book, All Your Worth: The Ultimate Lifetime Money Plan.
The 50:30:20 rule is a simple budgeting method that can aid in managing your money in a more effective manner, also in a sustainable way. It is very simple in practice. It asks that you break your monthly net income into three parts:
With your income divided into three sets of "buckets", you can use them for everything and operate without going beyond the set limit of each bucket. With this, one is instilled within them a sense of discipline while simultaneously ensuring you neither compromise your quality of living nor plans for the long term goals. So let us see how we apply this rule.
To begin acting on this rule, you have to set aside at most half of your income to be spent on the most necessary items you require. As huge as this proportion may seem to you, once you sum up the commodities that fall under this category, it will start to make a lot more sense.
These expenses are those that may be considered absolute necessities as they will be gotten regardless of where you may be staying, whether you are working, or whatever happens in the near future. These items, for most of us, are nearly the same! They may include:
The proportion will let you adjust while still trying to maintain a sound and balanced budget. And have in mind, it is more about the total sum than the individual costs. For example, 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.
This second category, and one that can make a lot of difference in your budget, is unnecessary expenses. They are expenses that enhance your lifestyle. Some financial experts consider this category discretionary, but in these modern times, many of these "luxuries" have become more mandatory to many of us. Well, it will depend on what a person wants out of their life and what they're willing to sacrifice.
These so-called luxuries include things like: your cell phone plan, television plan and even gym membership. But in a case where you travel a lot and your occupation is a work-on-the-go kind of job, then your cell phone plan is probably more of a necessity than a luxury.
However, you have some room to play since you can decide upon which plan you are going to pay for. Other things that fall in this category include road trips and going for eat-outs with your friends.
It is more of a personal decision to decide which things are worth spending on. Just like how nothing greater than half of your income should go toward necessary expenses, 30% should be the maximum amount you can throw in for personal discretionary expenditure. The lower the expenses under this category, the better you will do at debt repayment or saving to secure your future.
The final step in this rule is to commit 20% of your income toward your savings. This may include savings plans, retirement benefit accounts, debt repayments, and emergency funds. In this class, the expenses should only be paid after having taken care of essential needs and right before you take on your wants (personal spending).
This category could be considered as your get-ahead category. You will take care of your debts a lot quicker and make a lot more strides towards a stress-free future by committing as much of your income as you are able to.
The concept of retiring might not be too worrying while in your early 20s, so you would not be thinking too much about it then. But later on in life, it will be a concept that would be thrown at you to quickly embrace. It would be of very little stress to know that you are already saving for that part of your life early.
Overall, the 50:30:20 rule can be a really great budgeting method for some of us. But specific circumstances will determine whether this method is the right one for you.
Having just three main categories to follow up on might help you focus more on fine-tuning your money instead of getting beat down by the process of classifying each individual expense. For some people, not having a structure could make it more difficult to find means to improve their spending habits. Ultimately, you have to decide whether a budgeting system that is less or more detailed will be best for you.
It's worth noting that even though the proportions are sound, your life is not like anyone else's. This rule only provides a framework for you to work within. After you have reviewed your income and expenses then determined what is essential and what is not, only then can you make a budget that will help you make the most of your money. A few years from now, you still can fall back on the same guidelines to help your budget evolve as your life does.