Living on a paycheck to paycheck basis, that might result in you facing potential financial problems. Are you one who spend whatever you earn, leaving no room for savings. This could be dangerous as when an emergency comes, you might have no extra cash to spare.
Maybe it’s time to consider using the 50/30/20 rule, a method created by a Harvard bankruptcy expert, Elizabeth Warren, to budget your money.
So how does this work?
The 50/30/20 Rule simply means that you need to identify the 50%, 30%, and 20% of your net income. Assuming that your net monthly income is $5,000. The 50% goes to your needs, 30% goes to your wants, and 20% goes to your savings! With the income example above, the amount of money you can spend on each category are as follows:
The question now is, which items or expenses should you include in each category?
What is the 50%?
We already mentioned that 50% go to your needs. When we say needs, it comprises of the essentials. Think about your monthly groceries, mortgage or rent, car payments, insurances, and other utilities.
What is the 30%?
It is also healthy that you reward yourself with little luxuries in life. And that is why it is recommended that you allot 30% of your income to your wants. Again, let’s emphasize little luxuries as these are far more different from a grand vacation or a brand new designer bag.
In this category you can include dining out, internet bills, movie dates. Simply put, these are the things that can spice up your life or can add entertainment but you can always live without it.
What is the 20%?
The last one is called the savings or debt category. It’s the amount of money you save for the future or the extra cash you pay in advance on your current debt. The latter one means you can pay off the debt faster than expected.
Will this budgeting rule work for everyone?
Some people contest that the method is not applicable for everyone. For example, if you live in an area where the cost of living is high, a huge part of your income will go to you rent or housing. And that means 50% might not be enough.
While the percentage allocation might not work for all, categorizing your expenses can help you with your finances. Always know how much you earn and keep track of your expenses. From there, you can prioritize and adjust the allocation. The main point of using the 50/30/20 rule is that you should never overspend. Hopefully, this guide or the principles itself can help you balance your income and expenses better. Let us know in the comments if you commit to this rule, or if there are some other methods which work better for you!