If you are new to budgeting, it can often be overwhelming to figure out how to manage your finances each month. Whether you are a recent college graduate searching for your first job or a parent with three kids, the 50/20/30 approach can significantly help you assess your budget.
Not only you should organize, but also you must make hard decisions about how and where to spend your cash. You can’t always count on the experience and learn from the mistakes of other people because your own expenses and finances are unique.
In this article, we will share with you how you can use this 50/20/30 approach to help you see the big picture of where the money is going and how you can change this situation. You will learn a new approach of how to break the budget down into three buckets.
What is the 50/20/30 Guideline?
You are probably thinking that you will need some complicated spreadsheets and numerous spending categories in order to understand what to do.
Well, we have good news for you – you don’t need to be a financial specialist to get the idea of how much you may spend. The 50/20/30 approach is designed to build your budget with the help of three spending categories. Teens can use these budgeting tips easily.
The first category means that 50% of your income should be spent on essentials and living expenses. In other words, half of your money should go bills for rent, car payments, groceries, utilities and other essential things that don’t usually vary a lot from month to month.
You can also include subscriptions, such as Netflix accounts and gym memberships to fixed costs as you are committed to paying them each month.
The second category of 20% means you should put around 20% of the take-home pay too significant contributions or payments that will help you secure and protect your financial future.
Let’s consider three important targets every person should strive for: saving for retirement, credit card debt reduction payments, and saving an emergency fund. However, your own financial targets may include other bigger priorities and investments, like a down payment for a new house.
Last but not least is our third category where you should use no more than 30% of your income for flexible spending.
This includes all the things you want to purchase but don’t necessarily need (for instance, money spent on travel, movies, shopping, eating out, groceries, hobbies, or other entertainment).
Your everyday expenses may be different and vary from month to month. We mentioned groceries in the flexible spending category because how much you spend on food can vary, although it is considered to be a necessity.
Sometimes you may purchase more food to cook at home, while other weeks you may eat out more. As long as you realize how much exactly you spend and try not to go over budget every month, it doesn’t really matter what things you spend money on.
How to Start the 50/20/30 Rule
First of all, figure out what your current financial situation is and what exactly you would like to change or achieve. Define how much income you bring home on a monthly basis, and then split this money into the above-mentioned 50-20-30 categories.
In case you are self-employed, you should be more careful and track all of your earnings in order to count your average income per month. Maybe these budgeting mobile apps will be handy.
Why the 50/20/30 Approach Works
This rule is a wonderful opportunity to keep your personal finances under control and learn how to budget easily. This way you will be able to pay the bills, save for the future goals, and still, have the freedom to spend some money on entertainment.
Isn’t that what every person is looking for? There isn’t any uncertainty about this guideline; you can clearly see all of your action steps, and even make investments, savings, and reach for other financial goals.
As a result, the 50/20/30 guideline can lead you to the desired financial stability.