What Is The 50/20/30 Rule For Budgeting?By Bryan in Money
Trying to force yourself to start budgeting properly? Maybe you’ve just moved out and are living on your own, which is always a good motivator. No better time to become a math and finance whiz than when your living situation depends on it. So, get out your notebook or budgeting app and start making a note of everything expense you have. True, the process of making a budget might be a bit stressful, especially when you have all those costs written down in front of you, but eventually, it’s going to help you get your bearings and really learn to live within your means.
This is where the 50/20/30 Rule might come in handy. The principle itself is simple enough: divide your income into three categories so that you can live your life to it’s fullest while maintaining a proper budget and still having enough left over for the future. When you’re a young adult, you might not be able to find a job with a reasonable salary right off the bat, so budgeting wisely and knowing where every dollar you have is going will become extremely important. Let’s take a look at how the 50/20/30 Rule can help.
50% – The Must-Haves
The “must-haves” means just that. The things that you absolutely must have in order to get by on a daily basis. This will obviously become the biggest portion of your budget. No more relying on your parents for food, gas money, and a free place to live. It’s up to you to handle all those expenses now. This means, 50% (less if you can manage it) of your monthly income should be going towards the essential expenses, such as:
- Food/groceries and household supplies
- Hydroelectric/utility bills
Simple enough, right? Once you’re earning a regular monthly income, it shouldn’t be too hard to calculate half and put toward covering the necessities. However, just remember that while your rent/housing costs and utility bills won’t change too much, give or take a slight increase from year to year, the other essentials, i.e. food and transportation might fluctuate. There’s nothing wrong with splurging on your favourite snacks every once in awhile, but when you’re trying to stick to a budget, it’s best to do a bit of adding and subtracting before you get to the checkout line. And, while public transit costs are easy enough to calculate (fares might jump up by $0.25 every other year), the cost of owning a car is not. With gas prices always dropping and rising, it’s a little more difficult to determine how much you’ll be spending on your car every month, not to mention any repairs that need to be done. Don’t worry though, living on your own will help you learn to get your spending under control, so that you’ll have enough set aside for the next two categories.
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20% – Your Financial Goals
This category is one that you’ll learn to love when you really start being able to save money properly and work towards securing a healthy financial future. When you’re not making as much as you’d like at work, using up 50% of your hard earned income on the things that will literally help you live can be a bit tedious. But, while putting any extra dollars and cents into your savings might not seem like much help, especially when you have debt to pay off, little by little it all adds up. After a few years of scrimping and scraping together whatever money you can, you can look at your savings account balance and give yourself a much needed nod of approval. So, whenever possible, 20% of your income should be put towards:
- Your savings
- Paying off any debt (credit card bills, loans, etc.)
- Building an emergency fund
- Additional retirement savings accounts
The best thing you can do is start working on this category when you’re young and healthy. Putting money in an emergency fund can be especially important, just in case you should ever lose your job or if any other sort of financial crisis might arise. Learning how to budget so that you can indeed use 20% of your income in this category is a good step towards obtaining that solid financial future. After all, one day you’ll want to retire in comfort and if you have a family, leave something to them so that they can have futures of their own. It will also afford you the financial know-how so that you’ll have enough money in your budget for the third category below.
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30% – Things That Make You Happy
You might wonder why this percentage is higher than the category above. Getting your debts squared away and saving for the future should be more important, right? True, having money set aside for your later years is essential. However, what’s the point if you’re just going to be miserable up until the day your retire? When you’re working full-time, pushing yourself through night and weekend shifts just to get by, coming home and flopping into bed immediately can be one of the only joys you get out of life. But, if you’re starting to get your finances under control and manage your income properly, it doesn’t have to be. Sometimes it’s more beneficial to spend our money on the things that make us happy. If your idea of happy means having a good financial future, all the better, but it can’t hurt to set aside a bit of cash for a few luxuries that make life less monotonous. So, if you’re making enough, you can dedicate 30% of your income to:
- Vacation time
- Cell phone, internet or cable expenses
- Extra activities
- Gym membership/staying healthy (yoga or fitness classes, etc.)
Why work so hard if you’re going to sacrifice your health and happiness to do so? While a gym membership can be costly, exercising your worries away is good for the body, mind, and soul. It might not be a good idea to go on vacation every month, but a nice week long trip to an all-inclusive resort in the winter could be a great gift to give yourself. Or, maybe your idea of a luxury just means spending a little more to get a Netflix account or digital cable box with all the good channels. Whatever the expense might be, if you can afford it and still have enough left for rent and savings, it’s perfectly acceptable to use that extra money for a bit of fun and stress relief.
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Why Should You Follow The 50/20/30 Rule?
The simple answer is the same as was mentioned above because it’s an easy way to learn about budgeting and keeping your spending in moderation. However, the thing about the 50/20/30 Rule is that the percentages are adjustable according to the way you live your life. Most people differ in their lifestyles. While an expensive cell phone package might not be essential for some, it is for others. Some people need the gym atmosphere to motivate themselves to stay fit, while others have no problem with exercising outside or at home.
The point of the percentages is to give you the basic guidelines that you should be setting for yourself. This way you can afford to save for the future and splurge on the things that make you happy. The rule is 50%, 20%, and 30% or under. Anything that you manage to save instead of spend is a win no matter how you look at it, with the exception of the savings/paying debt portion of it (whatever money you don’t spend on necessities and fun should go directly into your savings or paying off your debts). So have fun, be smart and budget wisely!