Budgeting Made Easy: The 50 / 20 / 30 Rule
Budgeting. You either hate it or love it but you just can’t do both.
What is a budget?
A budget is a plan that helps you plan and allocate your income and expense. Yes, it’s really that simple.
How do you do it?
There are many templates depending on the kind of person you are and how detailed you’d like it to be. Here is an example of one I created. I’m also a big fan of the 50/20/30 rule, a popular and beginner friendly method to budgeting.
What is the 50 / 20 / 30 rule
The 50/20/30 Rule uses three spending categories for managing your personal finance:
50% [Living Essentials]
This consists of your basic needs such as rent/mortgage and utilities, transportation, insurance etc. The total of your essentials [including groceries, because you need that too to live] shouldn’t be more than this. If it is, well, consider … moving to somewhere cheaper, reducing or renegotiating your utility bills or insurance.
20% [Financial Priorities]
Once you have sorted out your most important bills to keep you alive, the next 20% is for the most important bills that will keep you alive for longer. That being your savings, investments and emergency fund. If you have debt to repay, you should start there first before allocating money for saving or investments.
Finally, you can enjoy your present life with 30% of your take home pay. Things such as your gym membership, social life and shopping come in here. As long as you’ve taken care of your basic needs and financial priorities, feel free to enjoy this amount any which way you want to.
Why do you need it?
Budgeting, and especially the 50/20/30 rule mentioned above easily helps you manage your personal finance without getting to nitty gritty into the numbers. I understand and respect that not everyone cares about where his or her nickels and pennies have gone to, however you should know in broad terms where your money goes. A good budget can help you decide if you’re paying too much for things, i.e. if your rent is more than 30% of your take home pay, you are most likely going to struggle to save or invest.
It keeps personal finance simple by letting you know how much you need to survive, how much to priorities for your future all the while still being able to have fun. The goal is to have a good and healthy bank balance and this budgeting method helps to do so. All budgets are different and so percentages may differ. The point though, is to know how much ‘generally’ you should be spending on the major areas of your life and this can be applied to anyone anywhere. As long as you’re taking care of yourself and your future, you can [guilt free] go to the movies, shopping or simply have a great time with friends without worrying about the important stuff.
What do you think about budgeting? Have you tried out this method?
Leave a comment and let’s chat. If you do budget, what problems have you found? If you don’t budget, please try this out and let me know what you think about it.
All my best wishes,