Establishing a traditional family budget means keeping track of all expenses (even the morning coffee), and not everyone can have this level of organization and planning. To help those who find it challenging to keep track and manage a traditional budget and save money, U.S. Senator and personal finance guru Elizabeth Warren created the 50/30/20 rule – which she explains in her book All Your Worth: The Ultimate Lifetime Money Plan.
What Is the 50/30/20 Rule?
It is a method that makes it easier to manage the family budget, a new way of looking at money that focuses on achieving financial goals. According to the author, it’s about finding a balance for your money. And ,a simple way to manage the budget. According to this rule, net income should be divided into three categories:
– 50% for needs/fixed expenses
It includes your financial commitments and the costs essential to your survival, such as: income or housing loans, car loans, insurance, food, electricity, gas, water, and telecommunications.
– 30% for personal wishes
It includes all expenses you make that are not essential. This includes meals taken outside, necessary clothing, cultural activities, monthly subscriptions, and other costs that are not essential to survival but make life more enjoyable.
– 20% for financial purposes
This part of the income must be used entirely for savings, investments, but also the payment of credits. You can, for example, contribute to your emergency fund, your retirement savings, or other concrete objectives (going on vacation or buying a car, for example), as well as different types of investments.
Applying the 50/30/20 rule
Managing the family budget properly is not a science. But if you want to try this method, follow these steps.
Calculate Your Net Income
The first step is to add the income that comes into your bank account each month. Whether it is a fixed job, extra work was done after work or investments that generate a fixed monthly income, such as a property you rent. Remember: you should only take into account after-tax values.
Limit Your Fixed Expenses to 50% of Income
It is now time to go back to the family budget and calculate the fixed monthly expenses. Add up all the amounts you spend on the house (income, credit, monthly bills, and supermarket), the family (schools, for example), the car (credit and insurance). These expenses, taken together, should not exceed 50% of your net income.
Set 30% for Your Variables (Personal Wishes)
It sounds easy, but it’s not. First, we need to define what personal desires are. They are all the little expenses you have for goods and services you like, as a mobile data plan or dinners at your favorite restaurant, but they are not luxuries. That latest generation smartphone or the costly pair of shoes must be properly planned not to affect your family budget.
What is the difference between “needs” and “personal desires”? All payments you can eliminate without any inconvenience are personal desires other than frustration. Costs that, if eliminated, could affect your quality of life (food and telecommunications) or put you in financial difficulty (home loans or insurance) are necessities.
Divide the Remaining 20% for Your Savings
This is the ultimate goal of the 50/30/20 rule: to help save money and simply manage the family budget. According to this rule, 20% of your net income must be invested in savings and investments. If you don’t have an emergency fund yet, take advantage of the 20% to build one. The same goes for saving for retirement or other financial goals. If this year you want to go on a dream vacation or buy a state-of-the-art smartphone, you should allocate some of your savings to these extravagances.
You now know everything you need to start using the 50/30/20 and manage your budget correctly. This method will help, especially if you are trying to make some savings. Remember to leave a comment and let us know how it is going.