THE 50/20/30 RULE OF BUDGETING
Quote of the Week: “We must consult our means rather than our wishes.” ~ George Washington
When it comes to money, there is no shortage of ways we could spend it. However, the emphasis of having a budget cannot be emphasized enough. Budgeting is telling your money where to go instead of wondering where it went. A budget, like a diet, takes discipline and if you bend the rules too much, you will find yourself right back where you started from.
We can dictate how we spend our financial resources and our budget has no control over that. You can choose to eat out every day, buy new clothes, and pay off additional principal on your debt, or a getaway over a long weekend.Whatever you want to do with your money, you can do it. However, therein lays the problem. Too many people want their finances to cover everything they want, the instant they want it, and if the money is not in the budget, they turn to borrowing to sustain their lifestyle.
When preparing a budget, we should focus on the one component we have real control over, our discretionary spending. The 50/20/30 rule of budgeting helps us categorize our budgets in a much easier way. This rule will help you not only figure out how much you should be spending in each area every month but also it will also tell you in what order you should be spending your money. The 50/20/30 budget divides up your take home pay into three main categories.
1. Essential Expenses
Not more than 50% of your take home pay should go towards essential expenses; which are the expenses you need in order to afford the bare necessities required to for a comfortable, but not extravagant, standard of living. These are basically the basic needs of food, shelter, clothing and utilities, among others.
2. Financial Priorities
At least 20% of your take-home pay should go to financial priorities, which are the goals that are essential to a strong financial foundation. These include your retirement contributions, savings contributions and debt payments, if you have debt. You should make these contributions and payments after you pay your essential expenses, but before you do any other spending.
3. Lifestyle Choices
Not more than 30% of your take-home pay should go to lifestyle choices, which are personal, voluntary and often fun choices about how you spend your discretionary income. They are often the entertainment bit of your budget, including various categories of miscellaneous expenses. While lifestyle choices are the last things you should include in your budget, you should never feel guilty about buying that expensive purse or ordering a nice bottle of wine at dinner as long as you have already taken care of your essential expenses and financial priorities.
Straightforward budgets are not always the best solution for people trying to get a handle on their money and the inflexible nature of budgeting can be a frustrating affair. A budget is a target which should be based on your real life, not how you wish life would be. Once you get the most important expenses sorted out, you will not have to worry about them much. Your rent or mortgage payment may not fluctuate from month to month, for instance, and the same may apply for your savings. Once you get used to saving a certain amount, it becomes a habit, and ultimately will improve your net worth and give you a greater sense of purpose and fulfillment.