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On a previous post, I shared some tips on how to create a budget. After receiving numerous emails asking for a sample budget template that can be used as a reference to help create one’s budget, I thought it would be helpful to write a post on the 50-30-20 rule (the same guidelines I used to create my first real budget).
The 50-30-20 rule is a good starting point for anyone who has had trouble creating a budget and sticking to it in the past. It serves as a good guideline to align one’s spending to their personal finance goals. Because the 50-30-20 rule allows you to pay your bills, spend money on fun things, and help you build your savings, it makes it a bit easier to commit to it.
Did I get you excited to get started? Let’s get to it:
Step One: Calculate Your Net Income
Your net income is your take-home amount from your paycheck. It is the amount after all the deductions (taxes and insurance costs) have been subtracted.
For other types of income, be sure to subtract taxes, business expenses, and anything else that reduces it.
Step Two: Budget 50% of Your Net Income for Essentials
Essentials consist of your living expenses such as housing, groceries, utilities, and transportation costs for work.
The cost of living may be super high in some areas, so it may be difficult to keep this category under 50%. However, it is important to try and get this category to 50% or less or it will eat into the other categories.
Step Three: Budget 30% of Your Net Income for Wants
Your wants are the fun things that you enjoy doing such as video games, clothes, dining out, and vacations.
Whereas the essentials are need to haves, the wants are the nice to haves.
This is the category that people tend to spend way more than 30% of their income on and it is also what gets them into trouble.
Step Four: Budget 20% of Your Net Income for Savings
The focus here is putting money towards your savings, paying off your debts, and getting investments.
This is the category that gets you ahead and puts you on a path to financial freedom.
Remember that the 50-30-20 rule serves as a good starting point and as a guideline for those who are just getting started or have trouble sticking to a budget. Once you get the hang of things, see where you can make adjustments and try increasing the percentage for savings and investments.
Have you tried the 50-30-20 rule? How has it worked out for you? Or if you are still on it, how is it working out for you? Share your experiences in the comments section below!