You might have asked the question, “what budget is right for me?” only to get the frustrating reply of “it depends“. Each person and household is unique and so when it comes to creating a budget, there never seems to be an answer that provides a one-size-fits-all solution.
A few years ago Harvard bankruptcy professor Elizabeth Warren, who in 2011 became the first female senator from Massachusetts, co-authored a book with her daughter Amelia Warren Tyagi called All Your Worth: The Ultimate Lifetime Money Plan. This book gave a rule of thumb for budgeting that for the first time, could be applied across the board and be relevant for all kinds of situations.
50/30/20 budget plan
The rule of thumb budget plan is called 50/30/20 and it is a three-step guide that anyone can follow in order to build monetary wealth and stability. So, can it work for you? Of course it can! Implementing the 50/30/20 budget is a matter of making changes in your lifestyle that will allow you to follow the guidelines.
As Liz Wetson from MoneyMSN.com explains,
“you may be discouraged by how far you are from the ideal. But running the numbers can help you understand why your money isn’t working for you. If basic overhead consumes so much of your pay check, it’s no wonder you have trouble saving, paying off debt and living the rest of your life.”
The 50/30/20 plan is calculated on your after-tax income. This is important because everyone knows that like death, tax is inevitable and takes up a significant portion of our wages. Once you’ve got your after-tax amount, you can then break it up into three portions.
Portion 1 – Needs
Needs are things like food, gas, rent, utilities, medicine, and insurance and should not take up more than 50% of your income. This is the time when honesty is the best policy and where it becomes all too easy to blur the distinction between needs and wants. Needs are things you cannot live without. Wants are things that you can live without for the time being but won’t affect your quality of life in general.
Portion 2 – Wants
Wants, according to the 50/30/20 guide are taken up by things like new clothes, unlimited mobile plans, cable television, and entertainment. The plan allows you 30% for wants. This is the time when making lifestyle changes and important distinctions will get challenging.
For example, bread is a necessity on your grocery bill but cookies and ice cream are wants. No point lumping those grocery ‘wants’ onto your ‘needs’ grocery bill or you’ll find your plan won’t work. So, when it comes to groceries, it might be a good idea to split your bill into two portions, needs and wants and then take an average over a month to see roughly how much each portion comes to each week.
Portion 3 – Savings and debt repayments
The final 20% of the plan is allocated to savings and/or debt repayments. When it comes to credit card bills and loan repayments, the rule is that minimum payments are considered as needs because if you don’t pay them you will damage your credit rating. Anything above or beyond the minimum repayment is considered a debt and can be taken out of this final 20%.
Again, it’s no use putting ‘wants’ on your credit card and then putting it into the debt portion of your budget. You are avoiding the bad habits that have got you into trouble in the first place.
Do you think you can do it?
The whole point of creating a budget and sticking to it is to face the reality of your financial limits. Learn what you can and can’t afford. This is the hard part. Being accountable and facing your limits is the challenge here, not the budget itself. It’s not easy to come to terms with the fact that you can’t afford to dress the way you’d like or go out as often as you’d like. But by making adjustments you will learn to live a more satisfying existence that you can maintain and control.
Many apply this 50/30/20 rule only to realize that their needs take up way more than 50%, and that’s when it can get tough and take time to trim the excess in your life. But with persistence and patience, it can become a guide that you adopt your whole life that will mean you are prepared for life’s unexpected financial costs and also for your future.
Do you use the 50/30/20 rule for your budget? Do you think you could?
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