There are several different ways I budget my money. First, I budget it on a monthly basis. Every new month, I write down my bills, when they are due, and what paycheck I’ll be using to pay them. Then, I budget every two weeks when payday rolls around. The monthly bills are factored in, as well as the amount I can put into my savings. With my monthly and bi-weekly budgets, I also think about what personal expenses I will include. My budgeting style is one of the many ways a person can track their expenses and savings. Another budgeting style has recently gained more popularity, especially for those just starting out. The 50/20/30 rule of budgeting gives a guideline on where to spend your money when it comes to essential expenses, personal choices, and financial responsibilities. In addition, this tip is great for beginning budgeters.
First, let’s break down the 50/20/30 rule. In this concept, a person’s income is broken into three different ways: 50% going to your essential expenses, 20% going to financial responsibilities, and 30% going to personal choices. The three components allow for your budget to be balanced, while you are still saving for your goals.
50% Essential Expenses: You might be asking which financial choices and obligations, such as bills, fall under each category. Essential expenses, or your fixed costs, are the expenses you have to pay each month. These can be housing bills, groceries, transportation, and utilities. Also, in the category are expenses you have committed yourself to paying each month, such as Netflix and other subscriptions. However, subscriptions can also be considered optional personal expenses that are more of a want, instead of a necessity. Setting aside 50% of your income can seem high, but it allows you more to adjust and still maintain a good budget. For example, if one bill is higher this month, than the 50% lets you decrease your expenses in another area. For example, try possibly walking or taking public transportation to lessen your expenses.
20% Financial Responsibilities: Also, referred to as your financial goals, 20% of your income will go towards retirement, debt payments, savings, and emergency funds. I know, sometimes it can be hard to set aside money for emergencies, but knowing from experience, you’ll be glad you did. This category can help a person “get ahead” in their debt payments and save more for retirement and their financial goals. Think of this 20% of your income as a saving net that, if needed, you can fall back on.
30% Personal Choices: Clothing, hobbies, entertainment, travel, and eating out all fall in the personal choices category. Some can argue this category is the most important and can make the most difference in a person’s budget. It depends on your wants and what sacrifices you are willing to make in regards to your finances. There is also flexibility in this category because the less you spend on personal choices, the more you can add to your fixed costs or financial goals categories. An important thing to remember when deciding your personal choices is determining your wants and needs. Your needs should have been covered under your essential expenses. When it comes to your wants, think about what you can live with or without. Do you really need that gym subscription when working out at home can be free? Do you really need a new closet full of clothes when you have ones at home? Just because you want something doesn’t always mean you can afford it. Think realistically and think about the longevity of an item. How much will you actually use the product? Will a larger expense eventually pay off its cost over the years? Truly think about what determines your wants and needs.
The 50/20/30 rule can be adjusted to fit anyone’s income. The categories allow you to determine what you consider an essential expense, financial responsibility, and a personal choice. The rule is designed to be a guideline for you to create good habits and set up a solid financial foundation.