Everyone wants to have control of their finances. To do so, you first need a budget.
Budgeting ensures that you don’t end up in debt because of living beyond your means. A budget will help you handle your finances well by paying for your essentials, wants, and having something to save.
It’s challenging to understand and choose a budgeting method because there are many ways you can create a budget. An example of a budgeting method is the 50/20/10 rule. US Senator Elizabeth Warren popularised this rule in her 2005 book, All Your Worth: The ultimate lifetime money plan.
What Is The 50/30/20 Budgeting Rule?
The 50/30/20 budgeting plan is a framework that helps you manage your finances effectively. The method breaks your after-tax income into three parts. 50% of the money is allocated on needs, 30% on wants, and 20% on savings and debt repayment. If you can follow this rule effectively, you will accurately see how much money you make and use.
How To Use The 50/30/20 Rule
Needs: 50% Of Your Income
Needs are necessary for survival, which means you cannot do without them. According to the 50/30/20 rule, you should use half of your after-tax income to cover these expenses.
If you find yourself spending more than 50% of your income on needs, you should try to find ways to cut your wants, downsize your lifestyle or make more money. For example, you can move to a smaller house, buy a smaller car or use public transport.
Some examples of necessities include:
- House rent
- Transportation costs
- Utility bills like electricity and water
Learn more about how to cut down bad habits and save more
Wants: 30% Of Your Income
Wants are not essential, which means you spend money on them, but you can do without them. They are costs that improve your way of life. These expenses, which can have a great deal of effect on your financial plan, are unnecessary.
These extravagances can range from your phone and TV plan to gym subscriptions, expensive gadgets, fashion items, eating out and unplanned travels.
However, depending on your situation, what looks like want could be a necessity. For instance, if you travel a great deal, and your occupation is working on the go, then your mobile phone plan is essential rather than a want.
You should not use more than 30% of your income on wants. That said, you can always revise this figure, especially if you have loads of debt or want to save and invest more.
If you’re drowning in debt, here are 4 debt pay-off strategies to consider
Savings: 20% Of Your Income
The last part of this rule is to submit 20% of your pay toward your savings. This part might incorporate savings plans, retirement benefits plans, debt reimbursements, getting the right insurance covers, investing and emergency reserves.
As mentioned above, if you can reduce your wants, you can put more money into this category. A great place to start is to ensure you set some money aside for your retirement.
If your employer has a pension scheme, perhaps you can top up your contribution. Your money will start earning compounding interest early, and you will also be lowering your tax liability. But, if you don’t benefit from an employer’s scheme, there is always the option of an individual pension plan.
Second, put money aside for your emergency fund until it has enough to cater for 6 months of expenses if things don’t go according to plan. Then, start saving for significant purchases and set a few coins aside to invest in the stock market.
Related read: Debunking Investment Myths That Are Holding You Back
Advantages Of The 50/30/20 Budget Rule
The advantage of the 50-30-20 budgeting strategy is that it’s simple. Planning to use your finances can appear hard, but you have only three spending categories to worry about.
You Realize Where Your Money Goes Each Month
An astounding 86% of people don’t know where their cash goes every month. Assuming you’re in that 86%, you are not alone, but it is not good company to be associated with. The 50-30-20 budgeting rule will assist you in realising where your cash goes every month.
It Pushes You To Reduce Your Fixed Costs
The 50-30-20 financial plan recommends that half of your income be used for essentials. Unfortunately, numerous families spend far more on rent, home loans, and power bills. The half cap can push you to reduce your fixed costs like power charges and negotiate better deals.
You Don’t Need To Monitor Your Single Purchase
Many people think a budget approach involves dealing with bookkeeping pages and observing your financial balance consistently. Instead, The 50-30-20 financial plan provides three parts of your spending. You allocate cash to those three, and you’re done! You don’t need Excel spreadsheets.
In general, the 50:30:20 rule can be a genuinely incredible planning technique. In any case, some specific conditions will decide if this technique is the right one for you.
Having only three primary categories to focus on might assist you in organising your cash as opposed to being stressed by the process of classifying each cost. Not having a good structure could make it harder to track expenses for specific individuals.
It’s pretty significant to note that although this budgeting rule sounds good, your life isn’t like anybody else’s. This 50/30/20 rule gives you a system to implement. After you have evaluated your income and expenses, then, at that point, resolve what is essential and what isn’t. Only then will you make a reasonable budget that will utilise your money well.
Eventually, you will need to decide whether you need a budgeting framework that is more detailed or not.