If you’re saving up for a new home or just simply trying to set a financial goal for yourself, budgeting your money can seem a little overwhelming at first. This recent Forbes article explains what the 50-20-30 rule is and how it can help you build your own budget.
What is the 50-20-30 Rule?
The 50-20-30 Rule helps you build a budget by using three spending categories:
- 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work.
- 20% of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (if you have debt, such as credit card payments).
- 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on movies and travel).
Keep in mind that the percentages for essentials and flexible spending are the maximum you should spend. Falling under those guidelines can leave more money for other financial goals.
How to start a 50-20-30 budget
Figure out what’s currently happening with your finances. First, look at your pay stubs to determine exactly how much money you bring home each month. That’s your income and what you’ll base your 50-20-30 split on. (If you’re self-employed, be careful to track your earnings and understand your average income per month so you can budget accordingly.)
Next, track your spending. Yes, that means keeping up with every last cent, from the big stuff such as rent to the coffee that you grab on the way to work. Then divide your spending into one of the three categories: essentials, financial goals, and flexible spending. From here, adjust your spending to ensure you’re falling into the 50-20-30 parameters. If you’re overspending on stuff you want but don’t need, it’s time to cut back to save more.
Why the 50-20-30 Rule works
It keeps your personal finances simple so you can pay your bills, add to your savings, and have the freedom to use some money just for fun. It’s also a good starting point for the budgeting novice. There’s no uncertainty, your action steps are clear, and it even provides for savings, investments, and other financial goals. This makes it much more likely that you’ll stay the course over time, ultimately reaching your desired financial stability.
The 50-20-30 Rule also offers some flexibility. You can bend it a bit by altering the percentages to make it work better for you. “It’s not about the exact percentage breakdown, because all budgets will be slightly different,” says Eric Roberge, a financial planner who specializes in helping professionals and entrepreneurs at Beyond Your Hammock. “The key is to take action and use a system to help you stay consistent in managing your money every month, and making sure you’re covering your expenses, being responsible by saving for tomorrow, and giving yourself some room to enjoy life today.”
[Read the full article: New to budgeting? why you should try the 50-20-30 rule]
