Do You Save Using The 50/30/20 Rule? Start Today!
Tired of tracking your expenses? Even with salary increases, you still can’t save a penny? Don’t worry, you are not alone! There are thousands of people out there with similar issues because we all know saving money is not easy. It requires a lot of plans, patience, and practice. Once you change a few habits and keep practicing them, you might see the results. Also, remember that all rules do not work in every situation, so it’s essential to be flexible with your rules to get the most out of them. One of the most popular ways to plan your finances is by using the 50/30/20 rule. Elizabeth Warren, the Harvard bankruptcy expert, first came up with the concept and co-authored a book with her daughter. Even if you know nothing of finances, this is a fairly easy concept with only several steps to follow.
Read on to know more!
Step 1: Find Out Your Income After Paying All Taxes
It is important to find out your salary after an income tax deduction in order to prepare a budget for your home. If you are self-employed, make sure you include your self-employment tax and expenses that include your travel, phone or food expenses incurred due to your business. Once you can calculate it all, you will get your net income. This is the amount you will be using to pay for your household expenses and save as well.
Step 2: Find Out Your Needs And Use 50% Of Your Income For Them
Always remember that needs and wants are two different things – the former being something without which it will be difficult to survive, and the latter being unnecessary desires that aren’t quite as essential for your survival. The electricity bill, house rent or house tax, monthly medicines, water bill, grocery shopping cost, insurance premiums are a few examples of your needs. On the other hand, the cable bill, and new clothes for back-to-school will come under want. Now, that you have made a list of your needs, find out the average expenses for them and keep them limited to 50% of your after-tax income. If it is hard, review your list to see if there are any items that can go under want instead of need.
Step 3: Use 30% Of Your Income For Wants
Whether it’s a new book, a t-shirt, or a new cellphone, wants must have an allocation in your budget. It’s important to treat yourself once in a while with something that you’ve been yearning for. Fulfilling this desire will keep the stress at bay. However, if your wants include something too exorbitant like designer shoes or a trip to Paris, you are not following the rule at all. Remember to keep it realistic, always keeping in mind your priorities. It is not easy though because of the insatiable nature of our desires but with a little willpower, staying in budget allocated for your wants will be easier.
Step 4: Allocate The Final 20% for Saving or Debt Payment
Now, that you’ve allocated enough for your needs and wants, it’s time to think of your savings (that is if you don’t have any debts to pay). Whether you’re keeping money for a future project or something else entirely, it’s important that you don’t spend every last penny. It is also wise to put away some of the money for emergency situations. If you keep doing this every month, within a while, you will have saved quite a lot for your future and have contributed a bit towards your emergency fund, too.
The Pros And Cons Of 50/30/20 Rule
The 50/30/20 rule is, however, not flawless. The reason it works is because it gives us a specific format with which to follow in managing our finances. It reminds us of the differences among obligations and splurges. But sometimes, we can get carried away despite having already established a budget. Sometimes, we might even need more than 20% of our income for debt payment! So, the effectiveness of the 50/30/20 rule depends on your status quo.
The Solution: 80/20 Rule
At some point, we all get tired of classifying and tackling our expenses. An easier way out is the 80/20 rule. Instead of classifying your needs and wants, you can put them in one category and allot 80% of your salary for them; the 20% goes to savings or debt payment. An effective way to ensure that you don’t spend the 20% is to immediately transfer it to your bank account. The remaining amount is yours to spend towards various expenses.
Depending on your expenses, you can change your plan to 70/30 or even 60/40 – whatever works best for you. The more you save, the earlier you can retire or start your own business – the choice is yours!
- the author isn’t a professional financial advisor
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