Drafting a monthly budget is a financial necessity but not very many people want to think about it despite the fact that everyone should. However, figuring out how to allocate your money during the course of the budgeting process can be tricky.
There however exists a budget rule that can help you live the lifestyle of your dreams while also saving comfortably. The 50/20/30 rule is the ideal budget rule. Simply put, 50 percent to necessities, 20 percent to financial goals, and 30 percent to lifestyle.
How Does It Work?
Before adopting this budget rule, you need to first have a monthly budget, and now is the best time to start. The 50/20/30 rule makes it easy. With this rule, the first 50 percent of your take-home pay would be channeled to your necessities, including rent or mortgage payments, utilities, loan payments, and tuition.
Some people however include food, clothing, and transportation in their 50 percent; others consider those to be lifestyle choices. How you categorize all these is however up to you.
The next 20 percent of your take-home pay should be employed towards savings and debt, or financial goals, including paying down credit-card debt, saving for retirement, building an emergency fund, or saving up for a vacation.
Furthermore, according to this rule, the last 30 percent of your income are what you should devote towards your wants or prevailing lifestyle choices.
What this means is that 30 percent of your budget should go towards your lifestyle expenses which can vary from month to month and over which you have some control. These can include shopping, entertainment, gym fees, hobbies,food, clothing, and transportation if you didn’t include them in your necessities.
Can Everyone Follow This Rule?
The 50-20-30 rule was first popularized by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book “All Your Worth.”
While there is no budgeting strategy that is ideal for every situation, some financial experts believe this rule is a good one to follow.
It has been touted as the “balanced money formula,” and while there are times you might need to stray (for instance, if your income drops you may need to give a higher percentage to necessities), sticking to this rule of thumb should keep your finances generally healthy.