People complain all the time that they do not have any money or do not have enough money. I use to be one of these guys, but not any more. This is because I know what a budget is. To many people, “budget” may be a yucky, off-putting word that says they can’t spend the money they want to spend. And they are not completely wrong, at least in the short term. But in the long term, a budget is the way to go. And one of the most popular budgeting methods is the 50/20/30 Rule.
The 50/20/30 Rule
This budgeting rule explains how you need to budget your money into three different groups if you want to make a difference in your financial status. The three groups and the breakdown are:
- Necessities (50%) – these are your bills and things you need. ex. Mortgage, food, electric bill
2. Financial Goals (20%) – used for paying off your debt, investing in stocks, or building your savings.
3. Wants (30%) – used for everything else you want. Includes things like eating out, going to shows, a new video game, etc…
My Thoughts On The Rule
This breakdown of money is a pretty good balance between the things you have to pay, things you should do, and the things you want. It is simple to understand, simple to implement, and can put you on the road to financial stability.
These are also great guidelines. If you cannot cover your Necessities with 50% of your income, you are doing something wrong. If you aren’t using at least 20% of your income for your Financial Goals, you are doing something wrong. If your wants are more than 30% of your income, yep, you guessed it…you are doing something wrong.
One bit of confusion that arises is when people confuse their wants and needs. People will claim that they need the top of the line flat screen TV. Or the $35,000 car was needed more than the $15,000 car. People often confuse their wants and needs, thus messing this system up.
If your income is low, you may not afford to be able to put 20% towards your financial goals. So what do you do? You guessed it…work on your income. Ask for a raise, go back to school, enhance your marketable skillset. You have to be willing to work for what you want, so don’t be afraid of the hustle. Embrace it!!!
The 50/20/30 Rule is a great rule to get started with budgeting. It is simple, easy to follow, and gives you a good balance of where you should be putting your money. I personally have never used this rule, but can clearly see its benefits. If you are not applying a budget to your finances, you need to start today. The 50/20/30 Rule is a great place to start and can provide a lot of insight as to how much money you are spending where. If you can’t afford to budget your money using this system, then you have some work to do.
If you are considering this rule, you could get out a sheet of paper, write down your income, add up your necessities, and see how much is left. Hopefully 50% of your income can cover this amount. If not, see what you can cut or change to make it work. Next work on the financial goals. Get that number to 20%. If you have to cut money from anywhere, cut it from your wants, not your financial goals. I know this can be tough, but it will be worth it. Use the 50/20/30 Rule to make this your best financial year yet!!!