Wondering how to budget your money? This simple formula makes it easy.
Managing your money is imperative to help you find the best home within your budget. And no, back of the napkin math won’t cut it. Not only do you need to organize, but you also have to make difficult budgeting decisions about how to spend your cash. This can be overwhelming, but there’s one smart and simple strategy that makes budgeting a breeze. It’s called the 50/20/30 rule, and it can help you track how much you spend and where you can save more, by bucketing your finances into three categories: living essentials, savings, and personal spending. Here’s how it works.
The 50/20/30 rule helps you build a budget by narrowing your spending into three categories:
- 50 percent of your income should go to living essentials. This includes your rent, utilities, and necessities like groceries and commuting to work. Keep in mind that this percentage is the maximum you should spend.
- 20 percent of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments. If you have loftier than average financial goals—like those who don’t have employer-supported retirement, or those whose student debt consumes the whole 20 percent—might want to consider raising that figure.
- 30 percent of your income should be used for personal spending. This is everything you buy that you want but don’t necessarily need: vacations, entertainment, and shopping. This lets you enjoy the money you earn, without going overboard—and you can certainly save if you spend less than 30 percent each month.
- Clarity and precision. Having just three simple categories lets you stay focused on your budget and goals as you move toward better financial stability.
- Flexibility and freedom. It works across income levels by having three categories that are alterable depending on your individual circumstance. “The 50/20/30 budgeting guideline can work whether you are renting or paying down a mortgage,” says Kayse A. Kress, a certified financial planner in Hartford, Connecticut. “This type of budgeting approach allows for flexibility, which is key since everyone’s financial picture is different.”
- Focus on the future. The savings category gives you a sure-fire way to pay down debt and save for major purchases, such as a down payment and retirement, says Doug Bellfy, a certified financial planner with Synergy Financial Planning in South Glastonbury, Connecticut. He recommends breaking the 20 percent category into 15 percent for retirement and 5 percent for a down payment on a future home.
- Determine your monthly take-home pay. If you have a new job or salary, you can use a free online salary paycheck calculator. Use this starting point to split your money into the 50/20/30 guidelines. Remember that being self-employed may cause your income to fluctuate per month, so base your rental budgeting on your average monthly income.
- Examine your spending habits. Look at bank, debit card, and credit card statements and track all of your spending. Don’t leave out the mid-afternoon lattes, weekly happy hour with co-workers, or extra storage for your smartphone. If you live in a high-rent area, such as New York or San Francisco, you may find your living expenses surpass the 50 percent portion. If moving to a less-expensive area is not possible, the living expenses category should cut into the flexible personal spending category until your income rises to overcome the imbalance.
- Plan it out. If your spending doesn’t align with the 50/20/30 Rule, come up with a plan to shift some of your expenses into the correct categories buckets. You may need to cut back on splurges or look at a different set of rental listings than what you were planning. On the other hand, if you spend less on living essentials or personal expenses, allocate it to pay off debt or to save for the future.