If you are a business owner, an employee, or a non-professional, learning the art of managing finances is equally vital for everyone. It is essential to build a budget that can help you stay on track while also achieving financial goals. There are countless ways of creating budgets, but if you are seeking an effective method. Then it is time you should know about the 50/30/20 Rule.
Are you surprised? Then continue to read to know all about it.
50/30/20 Rule – A Must Have For Everyone
The rule came to life by Elizabeth Warren (Harvard professor and senator) in her book, namely “All Your Worth: The Ultimate Lifetime Money Plan.” The purpose was to help working-class families better manage their spending and finances. With sounder planning, they would be able to deal with the unprecedented challenges in a decent way that offers beneficial outcomes. And the families undergoing intense financial crises, the rule would allow them to stay afloat until the storm passes away.
The 50/30/20 rules divide the money into three different parts based on the amount you earn. The three areas are necessary expenses, financial goals, and debts, and wants. The method also works great for people who are not well with money management and often struggle.
Necessary Expenses: They account for almost 50% of the money you earn, i.e., the income. It could be anything between utilities, mortgage, rent payments, groceries, and more.
Financial Goals and Debts: They account for around 20% of the income. In simple words, twenty percent should be the portion you should save for emergency fund, retirement fund, or payment of any debts.
Wants: They account for almost 30% of the money you earn. It includes expenses or any non-essential costs. Things such as shopping spree, phone costs, vacations or Netflix fee comes under it.
Trick To Implement the Amazing Rule Of Thumb
- Start by calculating your monthly income. Add the amount you receive and if there is a retirement plan. Then find out the withheld amount and add it back to the payment.
- Know the spending threshold for every area of the 50/30/20 rule. It will help if you multiply the income by 0.5, 0.2 for financial goals, and 0.30 for wants.
- You should build your overall budget around these areas. You have to check if your spending is less than the monthly goals that you have set. Also, don’t forget to track the expenses on a monthly basis.
Reasons That Make 50/30/20 Rule Effective
Managing finances in a proper way can become quite overwhelming. At times, people give up in between the journey. The 50/30/20 rule works amazingly in keeping a consistent person while also giving out productive results. It gives you three categories so you can easily divide the money in a balanced way.
Simply saving your money can not help you in leading a prosperous lifestyle. You have to use your money smartly that allows you to put aside some future use. While also lets you enjoy the wants. It will help you in controlling your irrelevant urges. Moreover, if there are any debts by any chance, you will be able to repay all that in a short amount of time. If you are only starting and finding the 50/30/20 rule a bit difficult, you can go with a budget builder tool such as My Easy Fi. We offer excellent money management software that gives you an in-depth and clear roadmap for managing your money.