The 50/30/20 Rule of Budgeting Clarified for Beginners
Planning and taking appropriate precautions are a part of life. If we want to be prepared for unforeseen circumstances, we should be planning beforehand. Nowhere is this fact more applicable than to our finances. Budgeting is all about planning and executing your finances, so that you can allocate them where they’re required.
However, when it comes to financial planning, we are careless. Budgeting enables us to plan, calculate, and secure our financial resources. That’s why the significance of budgeting cannot be underestimated.
One of the biggest misconceptions about budgeting is that people often think you need to have a large business to benefit from it. In actuality, even individuals can also benefit greatly from budgeting their expenses and finances. However, not only will budgeting allow you to save money but it will also make you a prudent and wise spender.
Let’s admit it, budgeting is hard and requires special skills and knowledge to properly execute, not to mention self-control. If you’re someone who earns a salary and doesn’t budget meticulously, it’s inevitable that you will get into financial trouble at some point in the future.
Budgeting is critical for identifying your areas of spending and helping you achieve your financial goals. Similarly, if you are in debt, then the only way to get yourself out of it is through prudent financial management and budgeting.
If you are someone who is looking to manage their budget on their own, then you need to start by developing skills in certain tools. The most prominent of which is excel.
There are tons of online resources to help you with learning excel. The benefit of excel for budgeting is that it is commonly used worldwide for the same reason and is a widely available software. Learning it online with Wiley efficient learning is going to help you excel at your budgeting and finance skills.
Budgeting is a vital factor that guarantees sound financial returns. When your finances are all taken care of, it will also limit the stress in your life and lead to good physical and mental health. If someone has to pay off their debt, and has no means to, it can lead to depression, anxiety, and sleepless nights.
The 50/30/20 Rule:
With the 50/30/20 rule of budgeting is easier to do. The 50/30/20 is simply a budgeting template that aims to allocate 50% of your finances toward needs, 30% toward wants, and 20% toward savings.
By implementing and following this budgeting rule, you’ll be able to accurately monetize your budget, so you know exactly where your money is being spent, restrain yourself from rampant shopping sprees, and manage to save a little as well.
Let’s now look at the categories one by one:
The rule suggests that you spend 50% of your income on your needs. These include expenditures that would come under the most necessary expenses. For instance, monthly rent, utility bills, insurance, transportation, groceries, etc.
Wants are the least prioritized needs. These expenses add more comfort to your life. However, since wants are something of a luxury, one can always do away with such expenses in order to save a few bucks.
By allocating only 30% of your budget to the wants means that you essentially put a cap on the expenses that fall into this category. Shopping, dining out, entertainment (movies, Netflix subscription), are some of the expenses that fall into this category.
20% of your income should go into savings, and this is what is going to make up your future financial stability. The savings you manage to wrest from your income, month after month, and let accumulate in a separate savings or emergency fund account can be your fallback in times of crises.
The savings accumulated here are going to help you ward off submitting to loan taking. Over time, the 20% of savings can go on to become your life’s savings that could be invested in some worthwhile ventures, if you so wish to.
Learn How To Apply The 50/30/20 Rule:
The 50/30/20 rule is pretty straightforward to apply. To start dividing up your income into those three categories (needs, wants, and savings), you will first need to divide your income into the constituting ratios.
Below are some of the significant points to ponder when applying the rule:
- Calculating your income
- Classify your expenses
- Evaluate & adjust your expenses according to the 50/30/20 rule
Calculating Your Income:
You should apply the 50/30/20 rule on your income after tax. The remaining balance left should then be divided according to the allocation criteria mentioned above.
Classify Your Expenses:
Get an accurate picture of where most of your money is spent. This can be done by going through the expense data from previous months, or simply by going through your receipts and bills.
Evaluate & Adjust Your Expenses According To 50/30/20 Rule:
Once your expenses, like rent, bills, groceries, shopping, dining etc. have been calculated, you then need to split your costs into the three categories of needs, wants, and savings.
While dividing your budget, always keep in mind that a need is something that you cannot live without and a want is a luxury, an added comfort. You mustn’t, in any case, sacrifice your needs for your wants.
By clearly dividing up your income this way, you will get a fair assessment of your cashflows, meaning you will be able to understand your financial habits with greater accuracy. Following through on the 50/30/20 rule, you will find that financial management is now not something that’s an unrealistic goal that you can only aspire to and never reach.
You will find that this rule is going to help you immensely in paying off debt, if any, and save for investing in a business of your own in the future.
Financial freedom is at the heart of every budgeting effort. Planning your budget is one thing but actually following through with it is entirely another. Most of the times, the goals are either too ambitious or too complicated to be implemented. The 50/30/20 budgeting rule is the antidote to our budgeting woes. With this rule, we won’t feel too limited in our expenses, and, at the same, manage to save money as well.