If you’ve been reading our blog for any amount of time you know that we’re very big on budgets and budgeting. Now, if you’re just getting used to the thought of creating a budget, maybe because you just graduated from college or just had your 1st child and your feeling the money pinch, there’s a great guideline that can help you called the 50/20/30 Rule.
The 50/20/30 rule basically breaks your budget down into 3 categories or “buckets”, keeping things much more simple than many traditional budgeting programs that seem to have an infinite amount of categories. Not only can the 50/20/30 Rule help you figure out how much money to put aside into these 3 categories each month, it will also help you figure out how to allocate your money better, save more and put more towards your retirement.
Here’s how it works.
1st there are Fixed Costs / 50
Fixed costs are any bills or expenses that stay the same from month-to-month. These include your mortgage payments or rent, your automobile loan payments and utilities like electric, gas and water. Anything that you pay on a monthly basis where the payment stays the same as a fixed cost.
The reason this gets the number 50 is that financial planner suggest you spend no more than 50% of the money you take home on those costs.
Next you have Financial Goals / 20
If you’ve ever heard the term “pay yourself first”, then you know what this next 20% is about. It means taking 20% of the money you make and putting it towards anything that will help secure your financial future. Emergency accounts, IRAs, 401(k)s and investments. Financial goals also include paying down any credit card debt that might have and can also include down payments on a new home or even saving for a well-earned vacation.
Finally there’s Flexible Costs / 30
Flexible costs include things like groceries, hobbies, entertainment, going out to eat at restaurants and even gasoline for your car. These costs can change weekly and/or monthly and, if you want to stick to your budget, don’t spend more than 30% of your take-home pay on them.
Groceries are included here and, even though food is extremely important, many people spend more money on food than they need to, in some cases much more.
In short, the 50/20/30 Rule can help serve as a guideline on how to divide your weekly paycheck and can help you to keep spending under control, increase your savings and keep your debt low. If you’re new to budgeting, it’s a great tool that will give you a great idea about what, where and how to spend the precious money that you take home every week.