Although budgeting might seem complicated to some, it can be done in a simple format that splits your finances up from each paycheck to ensure that you are splitting your finances wisely. One of the most common ways to do this is by implementing the 50/30/20 rule, which is a monthly budget that shows you exactly how much to allocate to your savings and living expenses.
A clear monthly budget can help you avoid overspending and instead begin building up savings. If you’ve ever tried to use a budgeting app that you can’t keep up with after three days, then give the 50/30/20 rule a try.
Understanding the 50/30/20 Rule
The 50/30/20 rule is a simple budgeting method that can help you manage your finances sustainably and effectively. It divides your after-tax income into three categories: 50% for “needs,” 30% for “desires,” and 20% for savings or debt repayment. Having a clear understanding of how much to spend on each category can help you stick to your budget and keep your expenses in check.
The 50% Portion
Your needs are expenses that you can’t avoid, such as paying for essential items that you would have to live without or paying rent.
The budget for each person may vary. If your needs exceed half of your take-home income, then you can try cutting down on expenses to bring them down a bit. For instance, you can try switching to a different energy provider or finding ways to save money at the grocery store.
The 30% Portion
With half of your after-tax income going toward your basic needs, you can use the other 30% to cover your wants. Non-essential expenses are those that you spend your money on even though you could live without them. This is typically viewed as “fun money,” as this portion of the budget is used on activities like shopping, eating out, traveling, etc.
Although the 50/30/20 rule doesn’t mean that you can’t enjoy your life, it does require you to be more conscious of your finances. This can be done by identifying areas of your budget where you are spending too much.
The 20% Portion
The remaining 20% can be used to pay off debts or to put money aside for your savings goals. Although minimum payments are typically considered needs, extra repayments can reduce your existing debt and interest, which makes them savings.
One of the most important factors that you can consider when it comes to building a better savings plan is regularly putting aside 20% of your pay. This can be done for various goals, such as saving for a down payment on a house or building an emergency fund.