Using the 50-20-30 rule to set an achievable budget
Whether you’ve just taken your first steps into the world of work or are nearing the age when you retire for good, it can be really difficult to stick to a budget. Many people find it difficult to identify how much money they should put aside for basic living expenses every month, and how much they should save. As everyone’s situation is unique, it’s not possible to create a universal template that everyone follows to create the perfect budget.
However, some people argue that, while a “one-size-fits-all” approach is non-existent, the application of a basic rule can transform your budget from miss to hit.
The 50-20-30 Rule
The 50-20-30 rule was first made popular through the work of Senator Elizabeth Warren in collaboration with a Harvard bankruptcy expert. As a result of their efforts, you can cast complicated budgeting spreadsheets aside and simplify your spending into three main categories:
- 50% of your post-tax income should be spent on the things you need to get through your daily life. For example, mortgage or rent payments, utility bills, food, transportation, and medical insurance.
- 20% of your post-tax income should be put aside in savings and any other investments that will take you closer to achieving your financial goals; for example, debt reduction payments or IRA contributions.
- 30% of your post-tax income can be allocated to the things that you like to do but are by no means essential. For example, going on vacation, dining out, visiting the cinema.
To get started, all you need to do is look at your monthly incomings, financial commitments, and, spending patterns. Create three lists, one for the 50% allocation, one for the 30% allocation, and the third for the 20% allocation. If your list of items in the 30% allocation exceeds 30% of your overall spend, this is the point at which you need to make some difficult decisions about how you can pare down spending in this area to make your budget. Remember, if you stick to the rule, you will always be saving money.
The reason why this budgeting approach has proven to be so successful for many people is because it is easy to implement and easy to stick to. If you follow it over a long-term basis, you will see your savings grow exponentially and will one day meet your overall financial objective.