What Is 50/30/20 Method And Steps To Do It
You might encounter 50/30/20 rule anywhere, either on Instagram or you’ve heard it from someone. If you are here that means you are still new to this method. 50/30/20 Method is the most common way to budget your finance. So, what’s exactly this method and how does it work?
What Is 50/30/20 Rule?
The 50/30/20 rule is an easy budgeting technique that outlines exactly how much you should allocate to savings and living expenses each month. Budgeting is important to avoid overspending, so make sure you have known about budgeting before really applying it.
The guideline directs 50% of your after-tax income to needs, 30% to items to ‘wants’ and the remaining 20% to debt repayment and/or saving.
How Does It Work?
50/30/20 Method is focus on budgeting your income to 50% Needs, 30% Wants and 20% on debt or savings. Here is the further explanation for better understanding.
50% Needs
Needs are the expenses you definitely must pay and the goods you need to survive. They consist of minimum debt payments, utilities, groceries, insurance, car payments, rent or mortgage payments, and insurance and health care. It is basically all payments for your life necessities. Your necessities expenses should be met with just half of your after-tax income.
If it exceed half than your income, it is better to cut-off some of your expenses. As example, you can reduce the expenses of petrol by using public transportations more. Or downsize any expenses of your lifestyle whichever you think you can cut off.
30% Wants
All the items you purchase that are not absolutely necessary are considered wants. This part is where you spend for your own happiness. This includes going out to eat and see a movie, that new handbag, trips, the newest electronic device, and ultra-high-speed Internet. This category also includes the decisions you make when upgrading, such as choosing more expensive meals or better smartphone. If you really think it out, everything in the “wants” category is optional.
Following the 50/30/20 rule doesn’t mean you can’t enjoy your life. You just have to be more conscious about your money. If you’re confused about whether something is a need or a want, simply ask yourself, “Could I live without this?” If the answer is yes, that’s probably a want.
20% Debts And Savings
Last, allocate 20% of your net income for investments and savings. This includes your mutual funds account, buying stock market or saving for emergency funds. Emergency funds is important in case you lose your job one day. This could also means to save for your retirement funds.
Have You Tried This Method?
Applying 50/30/20 method is not that complicated right? It is one of the best recommended method for budgeting. It is easy and simple to follow especially for beginner. Make sure to try this rule if you plan to budget. Also remember to check budgeting tips to maximize your budgeting method.
