Budgeting for monthly expenses can be difficult for many people. Winging your budget can make everything more difficult. Fortunately, you can streamline the process by utilizing budget guidelines, like the 50/20/30 budget rule.
Facts About the 50/20/30 Budget Rule
We know not everyone has heard of the 50/20/30 budget rule. Senator Elizabeth Warren – an expert on bankruptcy – developed the plan with her daughter. It functions by dividing your monthly expenses into three categories:
· Savings and Debts
You devote a set percentage of your after-tax income each month to each of these categories with the end goal of building your savings and eliminating your debt.
Breaking Down the 50/20/30 Budget Rule: The 50
Individuals who use the 50/20/30 budget rule should put 50% of their after-tax income towards “needs.” For our purposes, needs are defined as things you must pay for to avoid major inconveniences. This includes:
· Your Rent or Mortgage
· Utility Bills
· Car Payments
· Health Insurance
Minimum payments on credit cards are also considered “needs,” since your credit score can drop if you do not make these payments.
However, not all of your monthly bills are considered “needs.” In fact, many of them fall into the next category…
Breaking Down the 50/20/30 Budget Rule: The 30
The 50/20/30 budget rule also suggests that you devote 30% of your after-tax income to “wants.” Now, it is important that you understand how wants are defined in this budget rule. Wants are not strictly things like dinner out, or a new pair of boots.
In fact, “wants” are items or services that offer you more than the bare minimum in life. This can include:
· Anything Above the Minimal Amount of Clothing
· Your Home Cable or Internet Service
· An Unlimited Text Messaging Plan
Basically, anything that doesn’t have a hand in directly keeping you alive or protecting your credit can be considered a “want.”
Breaking Down the 50/20/30 Plan: The 20
Finally – according to Warren – 20% of your after-tax income should be dedicated to paying off debts and increasing your savings. Let’s break this down further:
Paying Off Debts
We mentioned that paying the minimum payment on your credit cards was a “need” in this budget plan. Any funds that you pay above and beyond the minimum should fall into the 20% portion of the 50/20/30 plan.
This area can also cover extra payments towards your car loan or mortgage. Note that, if your debts are too high to be covered by 20% of your after-tax income, you may be able to quickly get the money to cover them by taking out a personal loan or getting an online title loan.
Saving for the Future
You should also plan to put some of your after-tax income towards savings. You should focus on building:
· An Emergency Fund
· Retirement Savings
Sticking to a 50/20/30 plan every month can quickly grow your savings, giving you an additional measure of financial stability.
You Can Apply the 50/20/30 Plan to Your Budget
Breaking down your after-tax income using a 50/20/30 plan can give you a great starting point when it comes time to work on your budget. Now that you’ve heard about the 50/20/30 plan you can assess your monthly expenses and determine what can be considered a need or a want.
Start paying your bills, handling debts, and saving for tomorrow today with a 50/20/30 plan.