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What is the 50/30/20 Rule of Money?

If you find yourself in a position where you are struggling with your budget, you are not alone! Sticking to a budget is an incredibly important life aspect that many individuals struggle with. In fact, according to a recent survey by NPR, 1 in 3 Americans reported they would not be able to cover a $400 surprise expense.  

Not only do budgets help you to manage your daily expenses, they also provide you with the power to reach your financial goals. In addition, managing your money effectively reduces stress which can improve one’s overall quality of life.

The first important part of creating a budget is understanding different concepts of money management. One popular rule of budgeting is the 50/30/20 rule of money. With this rule, the idea is to categorize your expenses into three different categories: needs, wants and savings. Many financial experts agree that best practice is to divide up your money as follows:  

• 50% towards needs
• 30% towards wants
• 20% towards savings

When categorizing one’s expenses, it is important to make sure you are correctly allocating each expense. Needs should be considered expenses that are essential for living. Expenses such as rent or mortgage payments, the cost of a car and the gas for said car, grocery shopping and insurance are all examples of necessary expenses.

Wants are typically expenses that are dedicated to social events and entertainment. For instance, dinner out with a friend or the cost to see a movie in the theater can both be considered wants.

Finally, 20% of one’s income should be dedicated to a savings account. By putting 20% of your monthly income into a savings account, you can gradually build these funds to cover any emergency expenses.

It is important to note that the 50/30/20 rule is not a one-size fits all. Individuals need to take into account factors such as their lifestyle, amount of debt, income and other miscellaneous factors that can all impact one’s budget.

Why Can’t I Stick to My Budget?

While many of us may have the best intentions when entering into a budget, the harsh reality is that there are many common reasons why budgets fail. Some of these reasons include:  

• No Budget At All: You can’t stick to a budget that you don’t have!
• Unrealistic Goals: It is important to be realistic about how much money you spend each month. If you are looking to cut back on your “want” expenses, that is an admirable goal, but you must ensure that you are being realistic.
• Outdated Budget: Budgets are an ever-evolving concept. Many experts agree that budgets should be reviewed and updated monthly. If you have a change in necessary expenses, an increase in income or a decrease in income, you must update your budget in order for it to be effective.

Another sizable reason that budgets fail is due to a lack of emergency funds. Life has a tendency to throw emergency expenses our way. If you are carefully budgeting but then you find out that you need new tires or a home appliance breaks, you will find yourself in a situation where you are spending money that should be allocated towards other expenses.

If you find yourself in a situation where you are struggling to stick to a budget, do not be discouraged! The first step in this process is admitting that your current practice is not working, and then putting in the time and effort to make adjustments.

How Do You Work Out A Budget?

If you are ready to embark on the journey to make your budget stick, you will first want to start with working out an appropriate budget. When creating a budget, follow the below steps to set yourself up for success:

1. Calculate Your Income: You must have a solid understanding on your take home income each month. Make sure that you include any funds from side hustles and any other forms of regular monthly income.
2. List Expenses: This step can take time. It is important that you spend some time tracking just how much money you have going out each month. These free apps can help track your expenses and break them down into categories such as shopping, dining out and grocery expenses.
3. Review and Prioritize: Review how much money you will have left over each month after all of your necessary expenses are paid. If you find yourself in a situation where you are not breaking even, this could be a sign to find different ways to cut back other expenses or to pick up a side hustle. If you have money left over each month, determine how you will choose to allocate those funds. Do you want to build an emergency account? Are you saving for a large expense? Are you looking to pay off debt? Set a list of goals and prioritize them!
4. Track and Update: Set aside a little time each month to review your budget and to update. Do you find yourself saving more than you thought? Were you unrealistic about your entertainment budget? Regardless of the updates that you make, it is important to carefully and honestly review your expenses each month in order to determine the best path toward your goals.

Budgeting is hard work! When embarking on a budget it is important to remember to be patient and kind with yourself. Give yourself grace even if you fail at first and reward yourself (responsibly!) when you make progress.

How Can I Stick to My Budget?

Sticking to a budget can be extremely challenging! However, mastering your expenses and effective money management can be incredibly rewarding! If you are looking for some quick tips and tricks to stick to your budget, consider implementing the below into your daily routine:  

1. Be Clear With Your Goals: Designing your goals as SMART goals is typically best practice. The “S” in SMART goals stands for specific. The more specific your goal, the higher probability of success. It is much easier to conceptualize and achieve a goal such as “spend no more than $20 per week on dining out” rather than “eat out less.”
2. Automate: We are busy individuals! Set up as many of your bills for automatic payments as possible. Many companies offer a small discount for those who have automatic payments set up. In addition, automating your bill payments means that you won’t be subject to any pesky late fees!
3. Regularly Review Your Expenses: As previously discussed, it is of the utmost importance to regularly review your expenses. In particular, take some time and review your monthly subscriptions. Cancel any subscriptions that you do not use regularly and consider coordinating with friends and family members certain subscriptions that can be shared.
4. Hold Yourself Accountable: Consider confiding in a trusted friend or family member and sharing some of your goals. If you have another individual holding you accountable, it will be even more motivation to keep yourself on track!
5. Explore Debt Consolidation Loans: If you are unable to manage your credit card debt on your own and that impacts your budget, you may want to explore debt consolidation loans, such as title loans or personal loans.

Finally, it is important to maintain a positive attitude! While it can feel stressful learning to manage your money, this amount of stress is nowhere near the stress that one can feel from letting their money manage them!

By implementing these skills and tools, you are effectively laying the groundwork for a successful financial future!