The 50/20/30 Budget Rule
Budgeting may sound like an evil concept to most people, because it conjures up concepts of limiting yourself, labeling everything you want as one giant restriction. Some people even try to rename the act of budgeting with positive words such as wealth building process, financial goal planning or dream home system.
The basics of a budget
First, understand the basic definition of a budget: creating a plan for how you spend your money. Budgeting helps you balance your expenses and income. Your virtual CPAs remind you that budgets are re-evaluated as you reach certain milestones in life and grow older. What you budget for your rent in your mid-20s won’t be the same amount in your late-40s. When you’re young and single, you’re creating a budget for yourself, but with a family, you’re creating a budget for an entire household, which will surely include new expenses as priorities change.
The 50/20/30 budget
If you’ve never budgeted before and would like to start in the simplest of ways, your virtual CPAs recommend trying the 50/20/30 rule aka the 50/20/30 budget. Without diving too deep into creating a financial plan for yourself, this type of budget can help you become more financially responsible. It will help you form healthy habits that will greatly assist you in the future. You can make small adjustments to it, if you’re extra motivated, but keep it simple and convenient so that you can stick to the 50/20/30 budget.
Essentials, necessities and musts
The 50 stands for 50% of your income should go toward essentials, all the expenses you need paid in order to survive. Half of your income you’ll spend on absolute necessities. This 50% includes a wide variety of expenses that you’d have to pay no matter where you live or work. Your virtual CPAs remind you that these necessities are almost the same for everyone, including housing, food, transportation, utilities and the like. Even though you feel that you need an double-shot latte every morning, you don’t need it to survive. So your fancy coffee shop habit doesn’t count here.
Savings and your future using the 50/20/30 budget rule
The 20 stands for 20% of your income should go toward savings. Your virtual CPAs remind you that these savings can include a variety of plans from a savings bank account to debt repayments to emergency funds, IRA contributions and retirement and the like. This 20% should only be put away once your essentials are paid for.
Wants and modern luxuries
Finally, the 30 stands for 30% of your income toward personal expenses or your wants. Think cell phone bills, coffee shop runs, fine dining, movies and entertainment, anything you don’t need to survive, but really want and make your life more pleasant. Travel, gifts, gym memberships and even items such as upgrades and decisions such as luxury 2-door vs. an economical sedan. Some of these will feel like they’re survival in today’s modern world such as a cell phone, how else do you communicate? If you’re going to tweak and make adjustments to the 50/20/30 budget, this category should be the one you spend less on.