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The 50/30/20 Rule: A Useful and Easy to Understand Budgeting Method.

It might be puzzling to determine what specific direction to follow with such a vast amount of personal budgeting methodologies and options. To be more specific, one of the simplest and yet effective budgeting approaches is the 50/30/20 rule. This rule involves dividing of the total gross income of the month into three major expenditure areas namely; the necessary expenses 50%, the luxury expenses 30% and the savings or the payment of the debts 20%.

Needs – 50%

This encompasses all the needs which are required to run an individual’s life in all aspect, that is, bodily and spiritual needs. Things like:

  1. Living expenses (rent/mortgage, house taxes, repairs of the house)
  2. Groceries
  3. Electricity, water, and gas services are usually referred to under the umbrella of utilities.
  4. Insurance of health, home and automobile.
  5. Transportation (car payment, fuel, and expenses on public means of transport)
  6. Minimum debt payments
  7. Childcare

These are costs that are ‘absolutely necessary’ because they are meant to cater for needs that are fundamental. These basic needs should be met by the 50% portion in the country’s health care system. Monitor your current spending to determine whether you are over or under expenditure on need expenses.

Wants – 30%

The wants category is for those expenses which are significant but not necessary to sustain life and day to day functioning. Products you purchase willingly, not out of necessity that forces you to do so or makes you compulsory to do it. Such as:

  1. Dining out
  2. Entertainment, recreation costs
  3. Vacations
  4. Hobbies
  5. Gifts
  6. New gadgets and technology have become the order of the day, meaning there are many products out there that did not exist five years ago.
  7. Fashion/clothing
  8. Digital content (streaming/netfix, magazines, etc.,)

The ability to openly express what gives a person pleasure, liberation or reassurance in their life choices is another liberty. This extra 30% wants allocation means that you can afford such luxuries without straining your necessities or your savings plan.

Savings – 20%

Savings and Extra Debt Payments: Assessing the Impact on Consumers – 20 percent
The last 20 percent of the income remains for two vital financial concerns, namely, saving for the short and long-term and other forms of debt repayments. This includes:

  1. Emergency fund savings
  2. Retirement contributions
  3. College or other future savings This is because in the future, people who are college or other future savings may benefit from the incentives offered by the company.
  4. Additional car payment, personal loan or home equity loan

Consistent saving and reducing on debts are some of the best steps towards achieving financial freedom in the future. Whenever possible opt to automate the transfers so that the 20% is set aside, without you having the temptation to undo the transfer.

Implementing the 50/30/20 Budget

The great idea of breaking all the expenses into three categories is what makes the 50/30/20 budget to be easily followed. To get started:

  1. Some recommendations to establish spending allocations are as follows: To understand the actual spending pattern and to track the current expenses one need to prepare the expenses for 1-2 months. What areas are experiencing an increase in expenses? It may be difficult to find other areas to reduce your expenses since you’ve already considered all of your major expenditures such as rent or mortgage, utilities, insurance, credit card payments, and food.
  2. Learn more about your expenses and create a 50/30/20 spending plan that fits your financial goals. No, you don’t need to invest in a sophisticated budgeting tool at all – a simple spreadsheet would do the job quite well.
  3. To ensure that the 20% is fully secured, I have set up automatic transfers to unique savings and debt accounts. Similarly, do not spend more than the 50-30% for needs and wants, that is spend or withdraw just 50% for needs and 30% for wants.
  4. Recharge and recheck the budget on a monthly basis. While it is good to have a set budget for each month, it is okay to have some degree of flexibility but keep the long-term vision intact through the 3-6 months of planning.

In this way, the great advantage of the 50/30/20 rule is that while providing the necessary structure it at the same time allows for a certain amount of freedom within each of the three main groups. You can then add more variables to it depending on your circumstances and vary the proportions as incomes and expenditures fluctuate. The main point is to stay with the general plan or structure.

This simple budget split allows the needed money for needs, money for wants without going over, as well as money for saving and paying off debts and it doesn’t have to be complicated if done on a weekly basis. It is a combination of knowing where to invest, which and when, how much to spend, when to save and how to budget wisely this is the secret of the smart money!

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