Budgeting: The 50/20/30 Rule
You’ve decided that you are going to work on paying down your debts - that’s great! But where on Earth do you start finding money in your every day life?
Budgeting is a word that everyone hates but at some point most people have to embrace. If you are looking to get your credit in shape by getting rid of some debt chances are you are going to have to begin a budget.
One of the many kinds of budgets is the 50/20/30 rule (or method). This is a fairly simple system that can help you manage where your money is going or get you started in the world of money management.
What Is The 50/20/30 Rule?
Essentially the 50/20/30 rule divides your finances into three categories: 50 percent of your income should go to living expenses and necessities (car, food, rent), 20 percent should go to financial goals like saving and investing, and 30 percent of your income should be flexible spending money you can use on whatever you want.
With this method people can be more aware of what they are spending and earmark some of their income toward saving and paying down debt. The ratios are not set in stone for everyone - depending on where you live you might pay more in rent and other necessities. It is a great starting point and can be adjusted based on your own life.
How Do I Start?
You start by figuring out exactly how much money you take home each month. Once you figure out that you can divide by the percentages to see how much falls into each 50/20/30 slot. From there you have to look at your expenses from a few months to see how much you are actually spending so you can understand what needs to change. This is the time you can figure out if the ratios work for your expenses and how much you have to adjust them if you need to.
Why Is It Effective?
This method is effective because it simplifies the process of budgeting into three simple categories and makes you pay attention to what you are spring money on. Any process that makes us pay attention to what we are spending and gives us a goal for saving is a useful too and the structure most people need to make meaningful financial progress.
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