There are so many tips and tricks, gurus, and books that teach you how you should manage your money. Clearly, there is more than just one way to do it. The 50/30/20 rule is a great way to help you budget your money and help you reach your financial goals! It might just be the strategy you were looking for!
Let’s take a minute to go through the different steps you need to take when using the 50/30/20 rule so that you can budget your money effectively and efficiently.
What is the 50/30/20 Rule?
This way of budgeting was famously popularized by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan. The 50/30/20 rule states that you should allocate your net income into these three categories:
- 50% on essentials
- 30% on wants
- 20% to savings.
The 50/30/20 rule is meant to be simple and intuitive for anyone that wants to follow it. It’s very easy to pick up and incorporate it into your own finances, right?
Figure out your after-tax income
The very first step you need to take is figuring out what your after-tax income is. The 50/30/20 budget is calculated based on your take-home income.
Most budgeting tools and budgeting methods use your pre-tax income when figuring out how you should budget your money. I personally paper using after-tax income. This is the most accurate representation of how much money you actually have at your disposal.
To figure out your after-tax income, you can easily just take a look at your pay stub. Your pay stub usually shows your after-tax income. Sometimes it’s referred to as take-home pay. If you don’t have access to your pay stub, give HR a call or send them an email, and they can help you out.
Essentials: 50% of your income
Now that you know what your after-tax income is, it’s now time to allocate your income accordingly. The first step is to assign 50% off your after-tax income to Essentials.
Essentials are basically things that you need for survival. Things that are essential include rent, food, utilities, etc. By the way, the occasional trip to Starbucks does not count as essential 🙂 although I wish you did.
So for example, if you earn $3,000 a month after-tax, $1,500 will be allocated to this category. If you realize that your Essentials are more than 50% of your after-tax income, that it might be time to re-evaluate them. You might be paying too much on a mortgage or paying too much in utilities. So make sure you take your time and allocate it accurately.
Wants: 30% of your income
The second category is allocating 30% towards your wants. This is basically your discretionary spending. You wants are things like dining out, shopping, and entertainment.
These are expenses that you can live without. A Netflix subscription counts as a want and not essential 🙂 Put all those expenses in a bucket and pay for them with 30% of your after-tax income.
If you also realize that you spend more than 30% of your after-tax income on your wants, this might be a sign that you are overspending in this category. It’s important then to also take your time and to list out all your discretionary spending items.
Saving: 20% of your income
Last but not least, it’s time to allocate 20% off your after-tax income towards saving. This makes sure that you are prepared for the future and not spending all your money on needs and wants.
Once you’ve done all the math and you realize you’re not saving at least 20% of your income towards your future, then you might not be saving enough. Here’s the thing. People usually think about saving last. The opposite should be true! If you can’t save 20% of your after-tax income, then consider cutting down on your essential and discretionary spending.
What if I don’t make enough money?
All right, it’s all fine and dandy, but what if you don’t make enough after-tax income to have this budget work for you? There are a couple of things you can do.
Firstly, take a second and look at just how much you are spending on your wants. Typically, there are things we refuse to give up. Things like eating out, going to the bar every weekend, just to name a few, are things that we can cut out. It’s just a matter of priority. If you really want to change your financial picture, and better control your finances, then it’s time to take a look at your spending.
A second thing that you can do is work on increasing your income. Income is not a fixed thing. There are things you can do to increase it. You could do side hustles, invest in things that earn passive income, change jobs, or even increase your current income at work. Don’t think to yourself that you are stuck earning what you earn now. I promise, there are ways you can increase it, and It’s not that hard.
This method of budgeting it’s pretty simple and straightforward to understand. It might not fit everyone’s financial goals though. This is for you to decide.
If you are just starting out and trying to figure out how to budget your money wisely, then this method might be perfect for you. Definitely the best for beginners.
Have you tried it out yourself? Let me know in the comments 🙂
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