Having a budget is essential for financial health. A budget shows us how much money is coming in, how much is going out, and where it’s going. There are many ways to budget your money, and many of them are needlessly complicated. And if a budget is too complicated, you’re less likely to stick to it.
But there is a simple way to budget your money, the 50/30/20 budgeting rule. Let’s see how to make a 50/30/20 budget plan.
The numbers we’re using are your net income, your after-tax pay. Half of that, 50%, is budgeted for essentials. Things you must pay for like housing, utilities, groceries, auto payments, and insurance. Ideally, no more than 30% of your 50% is spent on housing. Anything more can make it hard to reach your financial goals.
The 30% represents discretionary spending. This is money you can spend on non-essentials like dinners out, concerts, vacations, gym memberships, and the like. Discretionary expenses could be mostly be eliminated in an emergency such as a job loss, but no one is expected to use the money they work hard for only for bills and saving for a rainy day.
The 20% is for financial goals. Things like saving an emergency fund, paying off debt, buying a home, and saving for retirement. In the last article, we discussed the importance of paying yourself first. This is the pay yourself first money! This is the smallest portion of your budget, but it’s the most important.
Swapping the 30% and 20%
The 50/30/20 budgeting rule can be adapted to your unique financial needs. If you have high-interest debt like credit card debt or payday loans, you should swap the 30% and 20% until that debt is paid off. That means 30% of your income goes to paying off the debt, and 20% goes to discretionary spending.
High-interest debt makes it difficult to make progress on financial goals, so paying it off should take priority. Low-interest debt like a mortgage or federal student loans are not as urgent, and paying them off can be part of the 20% portion of your 50/30/20 budget plan.
Make It Easy!
A good budget is really this simple. Forget endless categories and complicated formulas. Just use the 50/30/20 budgeting rule to simplify your finances and your life.