Stick to this rule and you’ll ensure you’re maintaining financial health.
What strategies are you currently using to build wealth? If you aren’t maintaining a strict budget, it’s easy to lose track of finances and overspend.
Budgeting is a vital aspect of financial planning because it helps individuals and households manage their money more effectively. Our recommended budgeting method is the 50/30/20 rule, which divides your income into three categories: necessities, wants, and savings or debt repayment.
1. Necessities (50%)
The first category, necessities, includes all of the expenses that are essential to your daily life, such as rent or mortgage payments, utilities, groceries, and transportation costs. These expenses should make up no more than 50% of your income.
Keep all necessities within 50% of your budget to ensure you have enough room for spending on the things you want as well as have extra left over to save or reduce debt. If your necessities are above 50% of your income, it’s probably a sign that you’re overspending overall.
2. Wants (30%)
The second category is wants. This includes any non-essential expenses, such as dining out, entertainment, or shopping. These expenses should make up no more than 30% of your income. The truth is, many Americans are overspending on what they want.
This doesn’t mean you can’t treat yourself with your hard-earned money, but this portion of budgeting is where most Americans struggle. Keeping your wants within 30% of your income ensures you can reach your financial goals and build wealth.
3. Financial Goals (20%)
The last category is financial goals. This includes any savings or future investments like retirement funds and emergency savings accounts. This category also includes debt repayments, especially if the payments are steep. These expenses should make up 20% of your income.
This is the most important part of building wealth; putting 20% of your income towards savings or investments will help you reach your financial goals.
How Do I Start?
Following the 50/30/20 rule ensures that you’re covering your basic needs and saving for the future, while allowing for discretionary spending. This financial rule of thumb can help you avoid overspending and increasing your debt burden.
To implement the 50/30/20 rule, start by calculating your monthly income after taxes. Then, divide that amount into the three categories, basing the amount on the percentages outlined above.
For example, if you earn $3,000 per month, your necessities would be $1,500 (50%), your wants would be $900 (30%), and your financial goals would be $600 (20%).
Once you’ve set up your budget, track your expenses to ensure you’re staying within the allocated amounts for each category. You can do this using a budgeting app or by simply keeping track of your spending in a spreadsheet or notebook.
Hot Tip: There are dozens of free calculators and apps available online to help you set up and stick to your 50/30/20 budget!
By following the 50/30/20 rule, you can gain control of your finances and make sure that you’re on track to reach your financial goals. It’s a simple and effective way to budget your money and avoid overspending.
If you’re having a hard time budgeting and reducing spending, check out our article on canceling subscriptions.