Whether you are part of 61% of Americans living paycheck-to-paycheck, or you often have plenty of money left at the end of the month, budgeting is the most powerful tool at your disposal to gain control over your finances. And yet, thrown off by complex spreadsheets and calculations, only 70% of families don’t craft a household budget each month.
But, with the right tools, budgeting does not have to be complicated or time-consuming. Here’s how to use the 50/30/20 rule to master your finances and streamline your budgeting project.
1. What is The 50/30/20 Rule of Budgeting ? Let’s Cover the Basics
Popularized by US Senator Elizabeth Warren in her 2005 book “All Your Worth: The Ultimate Lifetime Money Plan”, the 50/30/20 budgeting rule has been a game-changing tool for millions of people.
The main principle behind 50/30/20 Rule concept is that you don’t need complex, highly detailed spreadsheets to master your finances. Oppositely, 50/30/20 Rule of budgeting offers a simple but effective rule of thumb to manage your money: divide your monthly after-tax income into needs (50%), wants (30%), and savings (20%). What is personal finance? This no longer needs to be a confusing question when you get your budget under control.
While this strategy does not go into so much detail, it is a great way to start structuring your spending, improve your money habits, highlight unnecessary expenses, pay down debt, and save more. So, how do you get started?
2. How To Get Started With the 50/30/20 Budgeting Strategy
With the 50/30/20 rule, you won’t have to spend long hours filling boxes and remembering your expenses to the last cents. Instead, each category is broad enough to bring structure to your budget without overcomplicating it. Here’s how to get started:
Allocate 50% of your after-tax monthly income to “needs” – or the costs you can’t avoid
Half of your income should be used to cover your living expenses, including rent, utilities, bills, transportation, essential groceries and supplies, and other necessary costs. You could also include insurance and minimum loan repayments in this category.
Dedicate 30% of your income to “wants” – or non-essential expenses
A third of your budget should be considered your “disposable income” and you can use it to dine out, indulge in premium groceries, buy a gym membership, take vacations, and pay for entertainment (including subscriptions to services such as Amazon and Netflix).
Save 20% of your income – or use it to pay down debt
The last 20% of your salary should go towards your savings. And, while making minimum loan repayments is considered essential, you can use some of this 20% towards paying down debt. Ultimately, this last category should be allocated to building long-term financial stability and wealth.
3. Tips to Nail Your Budgeting Project
Today, over 50% of Americans have less than three months’ worth of savings – and 1-in-3 families consider their debt the main obstacle to overcome to build personal wealth.
The 50/30/20 Rule is undoubtedly an excellent way to build awareness of your finances, gain control over them, and become more accountable. However, each person’s or household’s financial circumstances are unique. That’s why you should:
- Modify the 50/30/20 Rule to meet your needs – look at the past month’s credit card report and payslip, and analyze your spending habits. This can offer you a snapshot of how much you tend to spend and what goals you should set for yourself. For example, you might stretch the “wants” category to 55% and reduce your savings – or vice versa!
- Find the right personal loan provider – personal loans don’t have to weigh on your budget and, when partnering with lenders like SoFi, you can even use your loan to build your credit. Just make sure to account for them in your spreadsheet!
- Create a monthly easy-to-use spreadsheet – after calculating your after-tax income, design a simple spreadsheet you can easily become familiar with. Or, use an automated mobile app to track your earnings and spending.
Lastly, don’t forget that that 30% dedicated to entertainment and non-essential activities is essential in a whole other way.
While you might be tempted to cut back on it and bulk out your savings, dedicating 30% of your budget to fun and meaningful experiences can make all the difference in how long you’ll be able to stick to your new budgeting project!