Have you finally decided to create your own budget? Have you tried to budget before and failed?
No matter. What you need now is a formula that is right for you.
Some people start getting stressed as soon as they hear the word budget. We’re going to change that.
Budgets can give you a sense of freedom from worrying about overspending every month.
Budgets don’t hold you back from your life. Having a budget will put you in the cockpit and help you make better choices.
A good sort of rule to aim for when making a budget is to follow the 50/30/20 principle. It’s a way to have a balanced budget and to actually follow it. It’ll help you stay within the lines without stopping you from enjoying extra things.
Let’s look at this 50/30/20 rule and see how it works.
What’s in the ’50’?
The rule says you should be putting 50% of your income into necessities such as rent or mortgage, transportation, and other bills.
Here’s some of the things involved:
- Mortgage or Rent
- Car Payments, Gas
- Electric, Gas, Sewage, etc.
- Groceries (not eating out)
- Necessary clothes
These are items that you’ll need if you want to survive such as shelter, clothes, food and water, and being insured.
The key part of this is to keep it down to 50%. The next time you buy a house or car, you’ll want to choose carefully as it can ruin your chances of keeping it to 50%.
One thing that people do is get confused with how much a bank will approve on a loan versus how much they can really afford. If a bank says you can get a loan of $300,000, they have calculated that this is the biggest amount of debt you can take with a chance of paying it off. They are actually trying to get the most out of your situation.
The great thing about the 50/30/20 budget rule is it’s in your best interested and not lenders.
What’s in the ’20’?
The 20 part of the formula is focused on future necessities instead of present necessities. This is the part that will help give you momentum for your future finances.
This 20% will be going to your finance goals. This may mean adding money to your emergency fund, debt reduction, investments and so forth. Credit card payments are also included here. You can also include money to put toward mortgage and car payments as well.
This is important because paying off existing debt will drop the ‘necessities’ percentage lower which will allow you to spend more on your wants and investing goals.
What’s in the ’30’?
You can basically think about this as the ‘fun’ percentage. These are things you want but can survive without. This involves, traveling, night life, concerts, etc.
If you remember, clothing essentials was covered in the 50% but when it comes to expensive or designer clothing, this is where you’ll set money aside for it.
Even better, you can use this category to focus on paying off debt, also known as, deleting your shackles.
Are you really looking forward to that dream trip? This is where you’ll find the funds for it. By planning a little more diligently, you can finally take that vacation.
How To Get Started With The 50/30/20 Rule?
Getting started will feel like climbing a mountain but it pays off exponentially as long as you stick to your budget. Let’s get started.
STEP 1 – LOOK AT YOUR INCOME
What you want to do first is look at how much money you earn every month after all your taxes and deductions.
If you have any side jobs or hustles, include that amount as well. You want to get the whole picture of your finances.
If you’re self employed or you freelance, your budget won’t always be so consistent. Figure out your average monthly income and start there.
STEP 2 – ANALYZE SPENDING
Look at how much you spend and where that money is going. Then find out which categories that spending belongs to. What I use personally is a personal finance tracker app. I use Personal Capital(Click here to sign up with Personal Capital and get a free $20 Amazon gift card). Another one to try would be Mint.
You’ll probably notice your numbers are all messed up after watching spending for a month. You may see that you spend a lot more than 50% on necessities or you spend half your income on wants.
STEP 3 – START REVISING
After you seen how much is coming in and going on, now it’s time to start readjusting your spending to fall in place with the 50/20/30 rule. This will take some creativity.
If your necessities are way more than 50% of your earnings, you’ll need to rethink what you consider necessary and how much you’re spending on those things.
This is the time when you will start some basic techniques on saving money.
Saving money is good but you can also start making more money as well.
If you eventually find that you can’t go under 60% a month for necessities, you can still use this budgeting formula. It can be flexible.
Let’s say your budgeting situation is currently 60/14/25. There’s nothing wrong with it. As long as you’re making progress. Keep it up until you can do 50/30/20.
Why Does It Work?
By having this budget, you will make big steps toward your goals without feeling restrained. Without stress, you’ll be looking at your next month’s budget with excitement.
You’ll be comfortable with your necessities while taking care of your future and finding resources for enjoyment too.