There’s one thing that many people have in common, regardless of age. That’s that, many of us want to learn to better budget our money. One of the big problems with this process is the amount of work that’s involved. I’ve seen some budget spreadsheet templates that have more than 20 fields for categorizing purchases. Let’s face it, categorizing each and every product is highly unrealistic, and can be discouraging. Nonetheless, there’s good news. Not all budgeting systems are quite so hard to follow through with. In fact, I recently came across the 50/20/30 rule, and it has made budgeting much easier for me. I believe that it can do the same for you.
Here’s how it all works:
The Basic Concept Behind The Rule
The basic concept behind this rule is that for most, budgets can be simplified with 3 broad categories. In doing so, managing your money takes much less time. With the 50/20/30 rule, each number represents a percentage of your income to be used for each one of the three categories.
Category 1: Base Expenses
The first category is also the largest. Base expenses mean expenses with fixed costs. For example, your mortgage payment, car payment, insurance, monthly food expenses, minimum credit card payments, electric bills, and more are all included in your base expenses. In a perfect world, once you get done paying for all of the necessities, the total should never come up to more than 50% of your income.
If you find that your base expenses cost more than 50% of your income, it’s time to do some brain storming. Can you find coupons on a regular basis to cut down the cost of food and household goods? How about finding ways to decrease the electricity bill.
Also, it may be hard to hear, but in some cases, it may be best to down size. In today’s debt driven world, we always want bigger, even if it’s bad for the budget. However, if you find that you are far over-stretched, it might be time to trade your car in for a cheaper option. If you’re renting a 3 bedroom house, consider downsizing to 2 bedrooms when your lease expires. Sometimes downsizing can be important, and while it can be scary at first, once it’s done, you’ll thank yourself as you enjoy a higher level of financial freedom.
Category 2: Financial Goals
The second category accounts of 20% of the budget. When it comes to financial goals, these are things like paying extra money towards your credit card debts, paying your car off early, saving, and investing.
For most, it’s best to start with paying off credit card debts. Then, move to paying off secured debts like auto loans and mortgages. After that, start investing the extra money as you enjoy debt freedom. However, when you get to the investment side, be careful. If you’re not well-versed in the finance and investing industry, it’s best to contact a financial advisor and have them help you manage your investments. Unfortunately these days, it’s too easy to get caught up with scam brokers, specifically in the forex in binary options space. So, when you make it to the investing side of the coin, make sure to do your research and if all else fails, don’t be afraid to reach out for professional help!.
Category 3: Miscellaneous Spending
This is like that miscellaneous drawer that just about everyone has somewhere in their homes. Anything that doesn’t fit into the fixed costs or financial goals fits into the miscellaneous drawer so to speak. Going out to the movies, buying that new drone, upgrades to your race car, whatever you want to do with this money is up to you. This is your spending money.
After first coming across this rule I thought it would be a bad idea. I’ve always been one to categorize spending and keep tabs on every penny. Nonetheless, I sat down, made a spreadsheet, and really thought about it. Not only does this make sense, it made my job easier and can do the same for you. Go ahead… give it a try!
Join The Discussion?
What budgeting tools have worked best for you? Join the discussion in the comments below!