Setting a monthly budget and managing your finances can be challenging. However, if you don’t know where to begin, you can simplify the process by following the 50/30/20 rule.
The plan divides your income into three broad categories: 50% of it for necessities, 30% for wants, and 20% for savings and investments. In this article we will break down each category and offer tips to help you become a more savvy saver.
Needs refer to the things that are essential to your survival (such as food and shelter), as well as any bills you need to pay on a regular basis. Rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payments, and utilities are among them. We hate to say it, but your ‘needs’ do not include streaming services, regular Starbucks coffees, or dining out—those are considered ‘wants’.
Wants, on the other hand, are all those things you buy that are not absolutely essential. Dining out and going to the movies, that new handbag, sports tickets, vacations, and super-fast Internet access are all included in this category. If you boil it down, anything in the “wants” bucket is optional, a fun little addition that makes your day special.
If you are thinking of options to cut back in this category, why not watch sports on TV instead of getting tickets to a game, or work out at home instead of going to the gym?
20% Savings and Investments
In this category are liquid savings, such as an emergency fund, financial investments, 401(K)s, and Roth IRAs.
An emergency fund worth three to six months’ worth of living expenses is typically recommended by experts. Additionally, some recommend building up your emergency savings first, then focusing on long-term investments.
If you are looking for advice on how to save for a rainy day, talk with our experts at Brightside to learn how you can make your money work better for you.
Why 50/30/20 is Beneficial
The reason why the 50/30/20 rule is so popular is because of its flexibility, simplicity, and minimal tracking. If you are new to budgeting and want to change your spending habits or save for the future, this is a great place to start.
When You Should Use the 50/30/20 Rule
Your budget’s effectiveness may depend on your lifestyle. The following factors make the 50/30/20 rule a good fit for a personal budget:
- Those who are new to budgeting
- People with ambitious financial goals
- Those who do not have high living costs
- Those who need an emergency fund
Even though the 50/30/20 rule may seem like a good rule of thumb for individuals, it may not be realistic for those who have low incomes or live in high-cost areas.
A Guide To Budgeting Using the 50/30/20 Rule
A budgeting method like this is a good way to start getting in the habit of planning for savings and debt repayment, however, unexpected costs come up, so it is important to warrant your budget some flexibility.
If you are considering using the 50/30/20 rule as a method of budgeting, you can make tracking your spending even simpler by using a budgeting app and automating your savings. Several apps will connect to your bank account and will let you set monthly spending goals for each category.
Keeping track of your necessities, savings or debt, and wants by using an app also helps you stay on track. Many checking accounts allow users to make recurring deposits to their savings account each month to make saving easy.
It can be stressful to experience financial hardship. With Briteside Solutions, we strive to empower consumers and make them personal financial experts. If you need guidance or advice on how to manage your budget, contact us today to get started.