What's The 50/30/20 Rule For Budgeting?
While budgeting isn't the most fun task, it is extremely important, no matter how much money you make. Budgeting will help you achieve your savings goals and get everything you want out of life. However, before you create a plan of action, you'll need to complete a number of other tasks first. To begin, determine what your short-term and long-term goals are. For instance, maybe in the short term, you need to pay off a medical bill, but in the long term, you're hoping to save a certain amount for retirement.
Next, you'll need to determine how much money you typically make and spend in a month. To find out what you typically spend, you could look back at your credit or debit card history for a month and categorize purchases, then add up the totals and see where most of your paycheck is going. This will give you a frame of reference that you can adjust according to your goals. Finally, you may benefit from following a budgeting plan, such as the 50/30/20 rule.
The three areas of the budget
According to the 50/30/20 rule, your paycheck should be split up into three categories: 50% to your necessities, 30% to your wants, and 20% to paying off debt or your savings. Before you start using this plan, it's important to differentiate between what's a need and what's a desire, as certain items may fall into different categories for different people, per Self. For instance, maybe you consider your morning coffee to be a necessity, while someone else could do without it and therefore save money. If you have a joint account with someone else and are working on your budget together, you may need to come to an agreement about what's a need versus a want.
To give you an idea about what types of things go in each category, let's name some of the most common needs and wants. Things like your rent, utilities, groceries, car payments, insurance, healthcare, gas, internet, phone, prescriptions, and pet care will most likely fall into your needs category. Wants, on the other hand, will involve things like eating out, subscriptions, gifts, entertainment, cosmetics, personal care, and vacations.
How to start saving more
Perhaps, after learning more about this plan, you've come to the conclusion that it seems just about impossible. Since rent is so expensive right now (20% higher than it was three years ago, per Realtor.com), maybe you can't imagine only 50% going to necessities or an entire 20% going to savings.
If that's the case, you may benefit from some saving tips that could help you get closer to the 50/30/20 budget. As mentioned, you need to have clear goals, and you should document where your money is currently going so that you can make adjustments as needed. To keep yourself from feeling overwhelmed, cut things out slowly and start small. For instance, don't jump into something that may be hard to maintain, like never eating out again. Instead, you could make it a goal to only eat out only once a week or once a month. Furthermore, when removing things from your budget, start with your wants and move to your needs. If you need to cut back on necessities, you may have to make some larger life adjustments like moving, selling your car, or adding another roommate to your apartment's lease.