Allocating your income is very important when it comes to managing your finance. Your income needs to be allocated according to your needs, wants, savings and investments. These aspects are very vital in ensuring your financial well-being. One of the ways that you can allocate your income is to use the 50/30/20 rule.
What is the 50/30/20 Rule?
This rule is one of the easy budgeting rule which enables you to manage your money more effectively and sustainably. Essentially, what you need to do is divide your monthly after-tax income into three spending categories which are, 50% for needs, 30% for wants and 20% for savings or paying off debt. With this rule, you are able to keep your expenses balanced across these spending areas and you can put your money to work more efficiently. You can avoid stress and avoid consuming more time to dig more on every detail on your spendings.
This rule will also help you with building structure in your spending behavior. Not only that, your financial goals will be easier to achieve, despite whatever your goal is.
How to Adhere to the 50/30/20/ Rule?
50% of your Money on Needs
Needs are expenses that are inevitable. They are essentials that help you get by in life. Without it, your life would be quite difficult. 50% of your after-tax income should expense your needs. Your needs will include things like rent, electricity bills, transportation, insurance and groceries. Since this aspect covers your needs, it may vary. There might be cases where more that 50% is needed to cover your needs. With this, you can definitely adjust it to make your expenses lower. You can seek out substitutes such as buying cheaper groceries or change to a different telco plan. These will help lower down the expenses for needs.
30% of your Money on Wants
Wants are not essentials. Instead, they are things that you choose to spend on despite being able to live without them. What they include are clothes shopping, holidays or entertainment subscriptions. If you are spending more than 30%, you might reconsider on cutting back some wants. This is not to restrict you from having a fun life, but instead helps you in being more conscious on your money and can help you avoid overspending.
20% of your Money on Savings
The remaining 20% will be put into your savings. This will help you achieve your savings goal or to pay any outstanding debts. Though debts are supposed to be classified as needs, extra repayments to reduce your debt and interests will be considered as savings. You can build a more durable savings plan by consistently putting in 20% of your money into your savings.