Budgeting effectively with the 50/30/20 rule

by | Jul 6, 2022 | Personal Finance

With the numerous voluntary and involuntary measures that most of us have taken to better manage our finances over the past three years, we all have kind of figured out how pivotal budgeting is to wise money management.

However, as we all know, the saving grace that is meant to be the skill of budgeting is oftentimes easier said than done. We’ve all scrutinized our lists, pruned here, augmented there, and made all the necessary adjustments to make sure that they are just right. Yet somehow, we still find ourselves stuck in the same uphill battle of trying to make our money stretch to the end of the month as they did in our beautiful budget.

The first step towards succeeding at properly executing your budget is to understand your priorities and budget according to these. The 50/30/20 budgeting rule is the simplest way to do this. The strategy operates as an easy guideline for planning your budget by allocating 50% of your net income to needs like rent, groceries, and utilities, 30% to wants such as hobbies, vacations and dining out, and 20% to financial goals (that is, savings and debt payments).

Practically, how the rule works, is you take your net income and multiply is by 0.5 and the result will be the amount that you should spend on needs, multiply your net income again by 0.3 to get the amount to be spent on wants, and then finally by 0.2 for financial goals. The next step is to make a list of your monthly expenses and tally them according to the category each one falls into and check whether you’re spending the correct amount in accordance with your 50/30/20 rule. Finally, track your expenses each month, and make changes where needed in order to stick to your spending thresholds going forward.

As fantastic as the 50/30/20 rule of budgeting is, there are other players in town in this budgeting game. These include, firstly the 80/20 rule which sets aside 80% of your income to needs, wants, and debts and then 20% is then strictly designated for savings. The second alternative algorithm is the 70/20/10 rule, which says 70% goes to living expenses, 20% to debt payments, and 10% to savings.

Whichever way you choose to do it, budgeting is a great way of taking control of your finances. When you budget, you know exactly where all your money goes, where you can make adjustments to save when you need to, and also how to effectively save and leave enough money for unexpected expenses and emergencies.

Founder and Debt Counsellor at National Debt Advisors Sebastien Alexanderson said budgeting was very important in keeping you on the right path when trying to reach your financial goals. “With an effective budget, you can keep track of your finances, see when you have to adjust your spending, and figure out where all your money goes instead of worrying about it,” said Alexanderson.

He said, while developing a budget involves difficult decision-making, setting realistic goals will help make the decision-making process easier. “Creating a plan to achieve your goals truly does starts with writing them down,” said Alexanderson.

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