Sticking to your budget each month can mean the difference between accomplishing your biggest money goals—like paying off debt and saving for the future—and, well, not accomplishing them. But it’s not always easy to know where to start when it comes to creating a great money plan.
If you’ve yet to master the art of budgeting, you might benefit from the 50/20/30 rule, a simple framework for allocating your cash. Adopting a budget now can also help you plan ahead to cover gifts and other expenses around the holidays, a time when it’s easy to overspend.
“It’s like baby steps for budgeting if you’re looking to get your expenses more in line with your goals,” says Kelley C. Long, a Certified Financial Planner and Certified Public Accountant at Financial Finesse. “It [gives] you great guidelines for how you should make spending decisions.”
How It Works
The 50/20/30 budgeting rule breaks up your monthly take-home pay into the following three categories:
50 percent for fixed expenses: Add up your basic living expenses, or non-negotiables, like housing, groceries, utilities, your cell phone bill and pretty much any other regular bill that has a due date. For payments that fluctuate, like an electric bill that’s higher in certain months, base your plan around that higher number. It’s better to overestimate and have money left over.
Hopefully, these expenses will add up to about 50 percent of your total pay, but if it doesn’t at first, don’t be discouraged. If, for example, your fixed costs equal 60 percent, you’ve got two choices: either look for ways to lower them (like negotiating your cable or phone bill or adjusting your thermostat for additional savings) or cut 5 percent from the next two categories, which are more flexible, to make up the difference. (Advisors would recommend you cut back on your flexible spending, not financial goals.)
20 percent for financial goals: These include saving and investing, like through retirement plans like 401(k)s and IRAs and brokerage accounts. Long advises including any additional debt payoff plans here, too. Translation: Your regular monthly student loan payment would fall under fixed expenses, but if accelerating your loan repayment is among your goals, file those extra payments under this category.
30 percent for flexible spending: Now for the fun part: Think of this final category as your personal spending fund. Everything from dining out to entertainment to holiday shopping falls under this umbrella.
“The 30-percent category is the one where most people are going to find the most value,” Long says. Because you’ve already taken care of your fixed expenses and financial priorities, you’re free to use this bucket any way you’d like. But if you know you’re going to be spending a lot on holiday gifts or travel, you may want to start earmarking some of that money now so you can avoid going into debt.
The 50/20/30 rule is a great starting point for those of us who need a little structure when it comes to keeping our money organized and understanding the ideal amount to spend on a given category. And it provides some flexibility to make it work for your unique circumstances.
Bonus: Whether you go over the 50 percent for fixed expenses or not, you’re likely to stumble upon some areas of wasteful spending that you can pare down or nix altogether. These revelations are what’ll help keep your financial priorities on point.
September 21, 2016