The end of the year can be a lovely time with fun events after work, Saturday brunches and lots of socializing over the holidays, but this can also be an incredibly expensive period of the year particularly when you factor in the cost of gifts for your loved ones.
The start of a new year is a great chance to get your finances in order and the 50/30/20 budgeting strategy is an easy and effective way to control your spending.
The 50/30/20 Rule
The 50/30/20 budgeting rule is one of the most popular ways to budget your income and it is easy to see why. It was introduced by Elisabeth Warren in her “All your worth: the ultimate lifetime money plan” book published in 2005 as a way for people to get in control of their finances to improve their situation and reduce financial stress.
So, how does the 50/30/20 rule work? Essentially, this involves dividing your post-tax income into three categories: Essential spending (50%), non-essential spending (30%) and savings (20%). The percentages can be adjusted based on your own needs and goals, but 50/30/20 is a good starting point.
Essential Spending
The rule involves half of your taxed income going towards the unavoidable expenses that you have each month. This will vary from person to person but usually include rent/mortgage payments, bills, food and travel costs.
Non-Essential Spending
30% of your taxed income can then go towards non-essential spending and the things that you want but do not need that month. This might include going out to eat, clothing, hobbies and luxury purchases.
Savings
The remaining 20% of your income should then be used to clear debt or to go towards savings. Automating this 20% to pay off debt or go directly into a savings account is smart and ensures that you are always building towards the future (the earlier you start doing this the better).
Tips for Implementing 50/30/20
To implement this budgeting rule, you need to establish your total income post-tax and list all of your essential and non-essential expenses each month. To control your non-essential spending, you will find that using a prepaid card that is loaded with 30% (or whatever percentage you use) will stop you from going over each month.
This post should help you to get started with the 50/30/20 budgeting rule. It is a smart way to start controlling your spending each month, which will hopefully help you to improve your financial situation and reduce stress. Many people worry about money because they do not feel that they are in control, so budgeting tactics like this can be smart and help people to take control.
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