Budget, the dreaded ‘B’ word! Why do so many people dread it?! Is it because it’s just a pain or is it because it restricts us too much? Maybe a bit of both! I know I’m going to sound like a TOTAL nerd here but I LOVE doing our budget, adjusting and updating it. So weird, I know … but I really think it’s my competitive nature and somehow I’ve turned it into a game. Every month I’m trying to figure out ways to spend less or save more. And I know everyone doesn’t enjoy this task as much as I do so I’m going to break down the method I use to stay on track every month!
It’s called the 50/20/30 rule and if you use this method for your own budget, you may find it a bit less restrictive since it outlines how much you should be spending in different areas of your life.
50% – Your Essentials
When you think about the basic things you need in life, just remember 50% of your take home pay (net income) should be going towards necessities. This means things like food, shelter, transportation, utilities, and in some cases childcare if it is needed in order for you to go to work.
You may live in an area with high housing costs, but typically salaries will be higher in these areas as well. Instead of trying to remember what exact percentage you should be spending on housing or transportation, 50% is a good round number to remember for the essentials.
20% – Financial Priorities
When you read about the 50/20/30 Rule, you will see that many articles say that 20% should be going towards savings. While I totally agree that 20% of your income should be saved, I know that most people starting out still have student loans, credit cards, or who knows what else which is why I adjusted the title to Financial Priorities. It really doesn’t make sense stashing away the entire part of that 20% into savings while you have a high-interest rate on any outstanding loans.
Get a bit of short-term savings put away (Dave Ramsey recommends $1,000), focus on paying down any high-interest debt, and then re-direct that full 20% back to building up short-term savings, retirement accounts, and any other outstanding debt with low interest rates. And just to clarify, when I say high interest I would consider anything greater than 6% as high in today’s interest rate environment. Get rid of those!
30% – Have A Life Fund
This is my favorite part of the budget because it’s the part you can spend on whatever the heck you want!!! I mean, a girl has gotta get her nails done once in a while, and hubby has to go on those hunting trips each season. And don’t forget new soccer uniforms, eating out, the movies; the things in life that make it all a little more fun.
Here’s an example of how a couple with a $5,000 monthly income would budget with the 50/20/30 Rule.
I hope this easy to remember rule helps your future budgeting days go a little bit smoother. I use a handy little tool called Mint to pull in my account data into an existing budget I created using this method online. It makes it very easy to see where I stand and I can easily make adjustments as needed. No need to dread this task any longer!
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