Getting started with Budgeting – “50-20-30” Rule

19 Feb Getting started with Budgeting – “50-20-30” Rule

Budgeting is the art of planning your expenses to achieve some future financial objectives. The most common objectives are retirement saving, emergency fund, car purchase. Home purchase etc. Without a budget it is very difficult to save money long term on our own, however, it takes planning and discipline to put money aside every month toward future. For beginners wanting start budgeting for the first time. It might be a good idea to follow the “50-20-30” rule. What is it exactly you might ask? It is a budgeting plan or method by dividing up your after-tax income into different percentage “buckets”. The money you bring home every month is spent according to the following guidelines:

50 percent:

– essential bills and expenses like rent, food, utility etc. There are the things that you have to pay in order to live.

20 percent:

– savings and investment. This is the part where you are saving for the future whether that is retirement or a down-payment for house, or emergency fund.

30 percent:

– discretionary spending like entertainment, hobbies, etc. This is what you want to spend money on for fun and personal enrichment.

How do you get started with “50-20-30” rule?

Well you have to first calculate how much money you are taking home after taxes and insurance per month. That is the amount of money you really have to spend. Once you have an idea of what that is then you can calculate how much money you have to spend in each category and start tracking that every month.  As you progress through the month try to stay close to the figures.  Keep in mind that it might not fit perfectly depending on your situation, but by adhering and keep yourself accountable to these percentages will help you establish a good financial habit.  If you are getting the hang of this after a few months then I would look at start putting more money into savings and investment category.  One way to do this is to “pay yourself first” meaning set up automatic transfer of a percentage of your paycheck (~20%) to a savings account so you “forget” that you even have it to spend.  The rest of the paycheck is then divided into essentials (~50%) and discretionary (~30%).  By automating paying yourself first it makes easier to save for the future and training yourself to live with a budget for the rest of your financial life.