"Deprivation".
"Restrictions".
"Boring".
All of these words constantly ran through my mind when I first tried to get my finances in order and implement a budget. I had so many failed attempts because, for one, I was making my budgets super unrealistic and, two, I cringed at just the thought of having to even be on a budget. I just didn't get why I needed one. So quite naturally, I was unable to make it a consistent habit.
Fast forward a few years later, I started to grasp the concept of a budget much better. I'd attribute that to mindset shifts as well. I realized that a budget was simply just a spending plan and that I didn't have to strip all of the things I loved and enjoyed doing in order to be successful with budgeting.
You can still live your best life while on a budget.
I didn't have to give up brunch with my girls or have to compromise my style. Once I implemented budgeting into my life, I was actually able to do MORE of the things that I enjoyed simply because I was much more responsible with my coins and knew where everything was going. I also cut out things from my life/expenses that did not serve me any longer and that I didn't value.
That's why I can appreciate the 50/30/20 rule when it comes to budgeting. It's simple, realistic, and doesn't deprive you of those things that you love while taking care of business. Let me break it down for you.
The 50/30/20 rule is simply this:
- 50% of your income goes to your needs
- 30% of your income goes to your wants
- 20% of your income goes to your savings and other goals
See, simple right?
Here's how you set a solid foundation and get started with implementing this rule into your lifestyle.
Analyze spending habits
First, it's imperative that you analyze your spending habits prior to establishing this budgeting rule.
Most people spend more money than they think they are actually spending. Additionally, they don't really know where their money is going. You need to analyze your spending habits in order to get down to the nitty gritty. Taking time to really dig into your accounts will help you when deciding where you want to allocate your coins with the 50/30/20 rule. It's super hard to get your financial life in order if you don't know where your money is going.
Make sure you are taking a close look into the discretionary spending that you are doing. These expenses are those that vary from month to month, to include:
- Eating Out
- Clothing
- Groceries
- Going Out/Entertainment
- Transportation
Ask yourself, "Am I doing the most with my spending, or nah?" Keep it 100!
Determine your actual needs (50%) vs. your wants (30%)
Additionally, many people have trouble sticking to a budget because they find it hard to determine the difference between true needs and wants.
Needs are items that you must have for basic survival/daily living. For example, food, housing, clothing, transportation, insurance, etc are all needs.
Wants are items you desire, but can live without. For example, travel, entertainment, hobbies, eating out, memberships, etc are all wants.
To determine if an item is a need or a want, picture yourself living without it. What consequences would occur if you didn't have that item in your life? Would those consequences have a significant impact or would you just miss the item? Being honest about the difference between a need and a want is a critical step towards smart budgeting.
Using the rule of 50% towards needs and 30% towards wants, actually allocate your income accordingly.
Identify savings and other financial goals (20%)
Once you've gotten clarity on where you're spending your money and identified your needs and wants, you then need to figure out what you want to accomplish with the remaining 20% of your income.
Here's a few questions to get you going:
- How much do you want to contribute to retirement?
- How much do you want to contribute to your emergency fund?
- Do you have any debts you want to pay off? How much extra do you want to contribute to reach those goals?
- Do you have any other investment goals? How much do you want to invest?
This is the roadmap for the 50/30/20 rule. Here's a quick example:
MONTHLY TAKE HOME PAY: $3,200
NEEDS: $1600
Rent $1,000
Utilities $150
Transportation $100
Food $200
Insurance $150
WANTS: $960
Travel $400
Eating Out $150
Nails $50
Apple Music $10
Netflix $10
Gym $10
Hair $130
Sneakers $200
SAVINGS/GOALS: $640
Emergency Fund $90
401K $150
Debt Payoff $400
The most important step comes with the implementation and execution.
Once you determine how much and where, it's time to actually put it to use and see how it works for you. The fact that it's easy to use and to get started with regardless of your income is an advantage of using this method. Additionally, you'll be able to shape bomb money management habits without having to do too much while simultaneously saving for your future. I also love how it's super flexible and you can adjust everything to fit your lifestyle and income increases over time.
One con of this method is that it may not be realistic for those whose expenses are over 50% of their income. If that's the case, you can determine if there's anything you can cut out or bring in additional cash if needed.
This framework should allow you to get a better grasp on your money management and grow your savings in the process. Just like with everything else, you have to find what works best for you and stick with it in order to see results.
Do you subscribe to the 50/30/20 rule when you budget? What are some of your tips for effective budgeting?