Gain Financial Balance with 50-20-30 Rule

claudiaBlog, Financial Independence Services, Personal FinanceLeave a Comment

Let’s face it, nobody likes budgets.

Don’t get me wrong. I’m still a proponent of budgeting.

It serves a very important purpose in understanding where your money is coming and going through your purse or wallet, so you can eventually take control of your money management.

A budget can also provide a visual map of where your financial goals and lifestyle spending are out of alignment. It also can show you if you are living beyond your means.

BUT…

Budgets can make you feel you are living a constricted lifestyle. Doing meticulous tracking of your expenses, can leave you feeling like a bean counter, which doesn’t work well for those of us who aren’t very detail oriented.

So what’s the alternative?

Instead of being turned off by traditional detailed budgeting methods, where you track all of your expenses.

Try out this hack and shortcut to the budgeting process…

The 50-20-30 rule!

The principle is that you would split your monthly income into 3 chunks.

  • 50% to your “must have” expenses
  • 20% to your savings
  • 30% to anything you want

budget-pie-chart

Your “must haves” are your TRUE necessities.

This category only includes the items you are contractually obligated to pay for and would have to maintain in the event of an emergency like a job loss.

  • Medical insurance
  • Mortgage/rent
  • Utilities
  • Basic groceries
  • transportation

The savings category is for you to reach your financial goals.

This is where the money that you allocate to pay yourself first would go. This could include:

  • Retirement savings
  • Student loans
  • Credit cards

The goal amount to contribute here is 20%. Depending on your current financial obligations, this amount may seem high, but you should try your best to cut back in other areas to meet this percentage.

Recent studies have forecasted that saving only 10% of your income isn’t enough anymore to accumulate enough funds for a comfortable retirement. (see this Investopedia article)

Last up is the wants category.

This is your fun money. Your truly disposable income. All the things you want but don’t necessarily need.

  • Cable tv
  • Gym membership
  • Dining out
  • Entertainment
  • Travel
  • Clothes

Per the formula, this should be 30%, but in reality, the actual amount that you have left over for wants will entirely depend on how well you do at living within the 50% must haves and the 20% savings goals.

A quick example:

If your living slightly above your means…

  • must haves: 60%
  • savings 22%
  • wants: 18%

Whatever your final number ends up being, you can spend without guilt on the money in this last bucket because you already know that your needs and savings have been met.

If your wants category is much less you’d like, you can treat it as an area for improvement. Look at cutting back in other areas, so you have more left over for lifestyle expenses.

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