Sign In/Sign UpTRENDING BASIC MONEY MANAGEMENT TIPS
TRENDING BASIC MONEY MANAGEMENT TIPS
07.20.2020 / Budgeting « Back to all articles
Is the 50/30/20 Rule for You
The Need for a Budget
Creating a personal budget is indispensable for managing money properly. If the money is being spent without any planning or tracking, the financial situation is always a mystery. This leads to stress and opens the potential for experiencing a financial catastrophe. But creating a budget can be intimidating – where is it all supposed to go? One way that many have tried is called the 50/30/20 rule.
What Is the 50/30/20 Rule?
The 50/30/20 rule is a guideline for how to assign percentages of the budget. It takes the total after-tax income of a home and gives it a job. Fifty percent goes to necessities. This is for utility bills, clothing, food, etc. It does not include restaurant eating or shopping sprees, this is just the necessities. It also includes minimum debt payments for credit cards, mortgages, and student loans.
Next, twenty percent is set to go towards financial goals. This could be savings, investment, retirement funds, and more – but most of all towards extra payment on a debt.
Finally, thirty percent is discretionary, it can be spent on fun and vacations and little extra things to add to a person’s lifestyle. The 50/30/20 rule gives a roadmap to follow and makes sure the important things are accounted for with the appropriate percentages.
Helpful as a Diagnostic Tool
Besides working as a budgeting framework, the 50/30/20 rule has great value as a diagnostic tool. By trying to set the budget up according to this rule, a person can see where their money is going. In most cases, the “lifestyle” portion of the budget will be far greater than thirty percent. This sheds a light on less productive habits such as spending on fast food that can then be eliminated. It also paints a stark picture of the debt situation if all the debt minimums push the fifty percent portion higher and higher. Knowing this information can empower you to make smart financial decisions.
When the Rule Might Not Work
Where this might not work depends on an individual’s situation. If a person makes plenty of money but struggles to find a way to save twenty percent of it, then there is likely a spending problem, or they are overcommitted in their borrowing.
Another person may find that their necessary utilities exceed fifty percent and they have little left to make extra payments. In this situation, each budget can be adjusted to meet the needs.
The 50/30/20 rule reminds the budget that something needs to go to savings, and that lifestyle spending must not be out of control. If a person can keep these in check, they may be able to shift the percentages around and still achieve the same results. Then, a plan can be made to tackle the financial situation so that someday the 50/30/20 rule is not just a pipe dream, but a reality.
Credit Talk
07.20.2020 / Budgeting « Back to all articles
Is the 50/30/20 Rule for You
The Need for a Budget
Creating a personal budget is indispensable for managing money properly. If the money is being spent without any planning or tracking, the financial situation is always a mystery. This leads to stress and opens the potential for experiencing a financial catastrophe. But creating a budget can be intimidating – where is it all supposed to go? One way that many have tried is called the 50/30/20 rule.
What Is the 50/30/20 Rule?
The 50/30/20 rule is a guideline for how to assign percentages of the budget. It takes the total after-tax income of a home and gives it a job. Fifty percent goes to necessities. This is for utility bills, clothing, food, etc. It does not include restaurant eating or shopping sprees, this is just the necessities. It also includes minimum debt payments for credit cards, mortgages, and student loans.
Next, twenty percent is set to go towards financial goals. This could be savings, investment, retirement funds, and more – but most of all towards extra payment on a debt.
Finally, thirty percent is discretionary, it can be spent on fun and vacations and little extra things to add to a person’s lifestyle. The 50/30/20 rule gives a roadmap to follow and makes sure the important things are accounted for with the appropriate percentages.
Helpful as a Diagnostic Tool
Besides working as a budgeting framework, the 50/30/20 rule has great value as a diagnostic tool. By trying to set the budget up according to this rule, a person can see where their money is going. In most cases, the “lifestyle” portion of the budget will be far greater than thirty percent. This sheds a light on less productive habits such as spending on fast food that can then be eliminated. It also paints a stark picture of the debt situation if all the debt minimums push the fifty percent portion higher and higher. Knowing this information can empower you to make smart financial decisions.
When the Rule Might Not Work
Where this might not work depends on an individual’s situation. If a person makes plenty of money but struggles to find a way to save twenty percent of it, then there is likely a spending problem, or they are overcommitted in their borrowing.
Another person may find that their necessary utilities exceed fifty percent and they have little left to make extra payments. In this situation, each budget can be adjusted to meet the needs.
The 50/30/20 rule reminds the budget that something needs to go to savings, and that lifestyle spending must not be out of control. If a person can keep these in check, they may be able to shift the percentages around and still achieve the same results. Then, a plan can be made to tackle the financial situation so that someday the 50/30/20 rule is not just a pipe dream, but a reality.
