Budgeting can be stressful and overwhelming. One can easily get lost or discouraged with so many different goals to save for! Do you know if you’re overspending? Are you treating yourself a little too much or can you actually treat yourself a little more? Find out by reading below!
What is the 50/30/20 Rule?
The 50/30/20 rule refers to a rule of thumb for personal budgeting. It means to allocate 50% of your after-tax income to your “essential needs”, 30% to your “wants”, and lastly, and most importantly, 20% to your savings.
50% Essential needs:
It includes cost that you absolutely need to survive. If you don’t need it, it doesn’t belong in this category.
What does it include?
- Utilities (electricity bills/water bills…etc.)
- Debt repayment
- Groceries / Food
What does it NOT include?
- Dining out
- Netflix Subscription
- Apple Music Subscription
- Ultra-speed broadband internet
50% of your after-tax income should go towards your basic needs of survival and to cover financial obligations. If you are spending more than 50% of your income, you will have to either cut down on “wants” like downsizing your lifestyle. Consider eating out less, use a cheaper source of transportation, or sell off some stuff for some additional income.
This covers expenses that are not essential.
- Dining out
- Vacation / Stay-cation (Under COVID situation)
- Newest iPhone/electronic gadget
- Hobbies (ex: Pilates/Yoga Membership/personal trainers/pottery class)
- Gym membership
Make sure your “wants” exceed 20% of your income. If it does, it doesn’t mean you can’t enjoy things I mentioned above, instead try to approach it differently. For example, instead of associating good food with dining out, try to cook new recipes at home! It’s a fun activity you can do with your partner or family, it’s usually cheaper and it’s safer (COVID reasons).
At last, you must allocate 20% of your income to savings and investments.
What does this include?
- Emergency fund
- Children education fund
- Mutual fund
- 401k account
- Bank deposits
- Real estate
- Other financial obligations
Which category should I be focusing on when I first start to save?
Your priority should be building your emergency fund as life throws you unexpected things at the worst times. (we are living through a global pandemic as I am writing this). The rule of thumb for the value of your emergency fund is it should be at least 3 months of your monthly spending. Your emergency fund will help with issues such as unexpected loss of a job, market crash, or medical expenses.
Your second investment priority should be your retirement funds. Calculate how much you will want to have monthly when you retire and start working towards that amount as early as possible to ensure a comfortable retirement.
Why is this budgeting rule important?
The number one benefit of the 50-30-20 rule is to having your costs broken down and organized. Having all your costs written down in detail will minimize the likelihood of you overspending unconsciously.
You don’t have to follow the budget plan down to the exact percentages, but it is good to follow closely.
How can I stay on top of my savings with the holiday season coming up? Find out more by following leinvests_ on Instagram!
Calculating Your Budget Sheet
I have created a super user friendly “Budget sheet” for self-evaluation. All you need to do is to enter your past monthly spending and you can determine your 50/30/20.
Comment below if you think that this was helpful. Share this with your friends and family so they can be one step closer to financial independence!
For more personal finance tips, visit www.leinvests.com/personal-finance.