How to Budget Your Money Properly
When it comes to money, there is certainly no shortage of ways to spend it – gym memberships, rent, car payments, retirement plans, gifts, you get the picture. One of the most common questions DebtHelper.com‘s financial team gets is, “Where should my money be going”? When it really comes down to it, the answer is different for everyone. Some individuals may be looking to start a budget to help them pay off debt, while others may want to buy a new home, and some want to plan for retirement. Certain factors will have to be considered for each of these goals and will be different for each individual. For instance, if you live in an area that has high rent, you will allocate more of your paycheck to housing and therefore, less money would go toward your goals.
While we can’t provide a set in stone rule for how to budget your money, we can provide you with a guideline to consider when setting up a budget: the 50/20/30 rule.
What is the 50/20/30 Rule?
The 50/20/30 Rule is a simple way to break your expenses into the following categories:
50% Essential Needs
These are necessities for maintaining your life: shelter, food, water, etc. Use 50% of your income for basic costs like rent/mortgage, utilities, food and transport.
20% Financial Responsibilities
Dedicate 20% of your income to financial goals like savings, debt payments, student loans and retirement contributions. These expenses should be paid only after paying for Essential Needs, but before you do any other spending.
30% Lifestyle Spending
This is your discretionary income left over after taking care of Essential Needs and Financial Responsibilities. Use 30% of your take home pay for “fun” non-essential costs, like cable, phone plans, internet, charitable giving, entertainment, gym fees, hobbies, and personal care.
The best part of 50/20/30 Rule is how easy it can be implemented into your life and be easily adjusted based on life changes. Once you start working on creating a budget and find what works good for you, it’s hard to reverse course. So while in the beginning stages, it might seem like a lot of work, stick with it. You will be amazed at how much you can save when you pay attention to where your money goes.
Need more help creating a budget? Download our Budget Worksheet below.