When it comes to budget your monthly finances, a 50/30/20 budgeting plan is the most popular method to pick. It helps you to divide your funds into three main categories- needs, wants, and savings.
That means you may spend 50% of your money on essential expenses like rent and food, 30% on personal wants like entertainment, and save the remaining 20% for emergencies. It sounds simple though there are a few things to know about this plan and understand how to budget correctly.
Let’s find out.
Understanding the 50/30/20 Plan for Budgeting
The after-tax income of every individual needs to be planned judiciously using a proper budget. That’s where the 50/30/20 rule comes handy. The rule says that you can spend 50% of your net income on living expenses.
Put aside 20% of the income for financial goals that may include savings or debt payments. And spend 30% on flexible items that you may want to buy but do not necessarily need. Here, it is essential to keep in mind that each percentage is the maximum limit for managing your expenses under each head.
What Makes the 50/30/20 Rule Effective?
There are plenty of reasons to start budgeting with this plan. You can save up for a new house or your dream car. It allows you to pay security deposits on a new apartment or eliminate your debts.
Also, budgeting lets you improve your credit score and spending habits over time. When you look at the prize of following this plan, it will motivate you to stick around and follow it every month.
Most importantly, the 50/30/20 rule keeps your finances simple, especially for the beginners. It reduces uncertainty from your financial actions and makes room for investments as well. You can always bend the percentages by slight margins to accommodate unforeseen expenses or unexpected fall in income.
How to Use the 50/30/20 Budgeting Plan?
You can make the most of this budgeting plan by following a logical approach. Assess your current spending habits to figure out the expenses you can control and reduce.
Take a look at your credit card and bank statements to know about your spending patterns. It helps to find the items where you tend to overspend. Also, put your irregular expenses in the 30% bracket.
For example, if you have to spend on repairing your vehicle or paying down payment for a new apartment, you can put these expenses under the wants category.
Finally, add all your income before implementing this budgeting rule. When you know how to budget with what you earn, there are lesser chances of discrepancies in your spending.
Does the 50/30/20 Plan Work for You?
Although this budgeting plan is simple and effective for most people, it may not work for you. It happens when you have a limited income and a mounting debt to pay.
In this scenario, you cannot carry your debts for extended periods while spending nearly 30% of your total income on personal expenses that aren’t necessary. Always leave some room for flexibility in whatever budgeting plan you choose.
In the end, every budget needs to be agile and adaptive to your income, lifestyle, and necessities instead of sticking to a single plan.