A Step-by-step of How to live within your budget
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Managing money can seem daunting, but it doesn’t have to be. There are many ways to manage your money, but we recommend this simple technique:” the 50-30-20 rule.” It’s a straightforward and effective method for organizing your finances while transforming how you handle your income and expenses.
This money management standard allows you to break down your spending habits within a series of 3 buckets, each designed to meet a specific need. Nothing more, nothing less. Once you learn to categorize your wants vs your needs, you will understand the power of leveraging your paycheck to save for what you truly want.
50-30-20 Budgeting Rule Purpose
The 50-30-20 budgeting rule became popular because of its strategy to break your after-tax income into Needs, Wants, and Savings storage buckets. This method simplifies money management and ensures a balanced approach to financial planning.
The 50/30/20 method is all about dividing your income into three different categories: essential expenses or your needs (50%), wants or desires (30%), and savings (20%). The ‘essential expenses’ category refers to things necessary for life, like housing, groceries, and utilities, while ‘wants or desires’ refers to entertainment. Savings’ primary focus is prepping for the future or rainy days. Let’s break this down a bit more.
50 % for Needs
This is your essentials category. It should cover expenses like rent, groceries, utilities, and insurance. The key here is to differentiate between what you absolutely consider a need for your daily living and what should be considered a luxury. Sticking to this rule helps maintain a solid foundation without overspending. Most people make the mistake of doing all three (needs, wants, savings) from within this one bucket.
This bucket should only contain items you must pay: rent, insurance, car note, food, and paying off loans or credit card debt. If you don’t currently have any fixed expenses, that’s okay. You can start by adding small ones like Netflix or Apple subscriptions to get you in the habit of automatically having the funds available to pay for the service. The goal is to make this bucket ready for automation.
30% for Wants
This category allows you some flexibility and enjoyment. It includes expenses for leisure activities, dining out, hobbies, and other non-essentials. While it’s important to enjoy the fruits of your hard work, maintaining this cap ensures you don’t overspend in areas that aren’t necessities.
The second bucket is just where you put all of your other spending money. This includes any money left over after paying off debts or other obligations from the first bucket. This bucket is for any wants or entertainment you want to dwell in. The purpose is to allow some wiggle room to have some fun. No one wants to pay off debt and not be rewarded consistently. Allow this bucket to do just that.
20% for Savings
The final chunk of your income should go towards savings and investments. This portion is crucial for building financial security and preparing for future expenses, whether it’s an emergency fund or retirement savings.
We recommend starting with funding an emergency fund and allowing it to be automated. The amount depends on where you are and where you want to be. Set aside a certain monthly amount and sign up for automated payments directly from your direct deposit.
Then forget about it (heavy on the forget, like hide the card). Once you establish your emergency fund, only then should you focus on creating diversity through investing in the marketplace ( stocks, bonds, crypto).
The Benefits of the 50-30-20 Rule
Adopting this framework provides several advantages. But the primary reason for it is to simplify decision-making about your finances. Making it easier to track where your money goes each month. This method is flexible enough to adapt to different income levels and financial goals. It also encourages financial discipline, ensuring you live within your means while still being able to enjoy life while also planning for the future.
How to Implement the 50-30-20 Budgeting Strategy
Getting started is straightforward. You can begin by calculating your after-tax income. Then, allocate your expenses into the three categories: Needs, Wants, and Savings. This may look different from many; some use checking accounts, and some use the envelope method.
Regardless, you will need to review and adjust these categories to reflect changes in your income or financial goals. Remember, consistency and honesty about your spending habits are key to successful budgeting.
Effective budgeting is not just about tracking expenses; it’s also about setting and achieving financial goals. Whether saving for a vacation, buying a home, or preparing for retirement, the 50-30-20 rule can help you set clear financial targets and work towards them systematically.
Final Thoughts
Embracing the 50-30-20 budgeting method can lead to a more organized and stress-free financial life. It’s a simple yet powerful tool to help you take control of your finances, allowing you to balance between meeting your current needs, enjoying life, and preparing for the future. Share this guide with those looking to improve their financial planning, and watch as it makes a difference in your financial journey.
