50/30/20 Budget Rule

50/30/20 Budget Rule
Stefan Ivanovic

Article by

Stefan Ivanovic

Jun 10, 2019

A lot of people barely manage to cope with monthly expenses and get by their salary - but there's one trick.

Here's what this is about. The rule is easy! 50 percent of your salary should cover your apartment, rent, food and transportation bills. 30 percent are some other expenses such as clothes, footwear, outings, gym and going to the restaurant. 20 percent of your salary should be left aside and this is your savings.

This method of budgeting is great for people who do not want to track every cent, but they still want to ensure that they dedicate enough money to save and repay debt.

According to the 50/30/20 method, 50 percent of your household income should be directed to "needs", 30 to "desires" and 20 to savings and repay debt.

Suppose you are not too interested in tracking every dollar, but you like the idea of adhering to the 50/30/20 method. Here's the simplest way to do this:

First, direct 20 percent of your salary into a savings account. Start with savings - it's called "paying yourself first". Set up an automatic transfer to payday that immediately takes money out of your pay so you never see it. Share this money into a combination of your pension and retirement account.

For example, you can put aside 5 percent on a savings account that is intended to "pay for a car for yourself", 5 percent to a savings account that is set aside for home payments, and 10 percent to your 401k. (Hopefully you will have an employer job that adds an extra 3-5 percent).

Second, pay all your bills "needs" for that month. Pay your mortgage, your utilities, your phone bill, pay your car. If these bills are coming later in the month, put aside the special costs for the specific current account you use to pay only your "needs". If you have certain needs that you have to pay in small increments throughout the month, like gasoline, put aside a month's money into that current account.

Regardless of the rest, you can spend on "wants" like restaurants, movies, sports, clothing and footwear that you really do not need, and a bit of luxury like car wash, home-care services, cable television and a hairdresser.

If you cross the numbers and see that the amount that is available for spending on "wants" is less than 30 percent, you will be able to reduce your "needs". If nothing else, the savings will not fail because you paid the first one.

Save and then spend

Here is the revised version of the 50/30/20 method: twenty percent is the minimum amount you should save, but freely choose a larger number.

After you have paid for your savings, spend the rest. Do not worry about what categories you spend, and do not worry about what kind of cost enters your budget. Be sure to save enough money and spend the rest freely as you wish.

Periodically check the balance to make sure you have enough money for the rest of the month and if necessary adjust if you do not. After several months of this, you will get a hang of an automatic lifestyle that is consistent with your income, with the savings you've set aside at the beginning of each payment period.

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