Coined by Senator Elizabeth Warren and her daughter; Amelia Warren Tyagi, the 50/30/20 rule was first created as a method for working-class families to plan their budgets and reach financial security. In their book; All Your Worth: The Ultimate Lifetime Money Plan, the mother-daughter duo discussed ways to take control of your hard-earned money and finally live the life you wanted.
Today, the method is typically used as the much-needed guidance on how one can properly treat their salary, so it won’t simply come to say hi and then leave. It especially gained popularity due to its easy and welcoming approach to an otherwise ‘scary’ matter.
Thinking of adopting this rule? Lucky for you, you don’t have to go through the whole book to start doing it. Here we have concluded everything you need to know about the magical budgeting rule. Let’s check it out!
Table of Contents
The meaning behind the name Where half of your salary goes
Fifty percent of your salary is dedicated to your primary needs. This means things like rent, utilities, groceries, and insurance. This category can also include other mandatory payments you have to make, such as mortgage and installments.
If you’ve totaled your primary needs and exceeded half of your salary, then it would be wise to try rearranging some things to minimize the amount. One of the things you can try is to switch to a more modest car or find a place with a lower rent price. Moreover, alternatives such as carpooling and cooking at home are also worth trying out.
Thirty percent of anything you want
The other half of your paycheck is going to be split into two parts. Here’s the good news: the first thirty percent of it is all yours to use as you please. So, whether it is a new bag, a PlayStation, or a getaway trip you’ve been wanting, you can officially cross them off your list.
It is especially important for you to be stricter on this part of the rule, as we often get carried away while shopping or buying something we have been wanting. To make sure that you don’t overspend, try installing an app to track your spending on your Xiaomi phone, or simply list down how much you spend on each transaction on your notes.
The last twenty percent
Now, to the last portion of your salary. As one of the initial steps towards financial stability is savings, that is where the rest of your salary will go. By doing this, you are setting a safety net for an unforeseen situation (there’s always a chance for another pandemic) or worse, your income stops coming.
The general rule of thumbs for savings is to create an emergency fund worth at least 3 months of your salary. This will ensure that you can still sustain yourself should you lose your job before settling on other income sources.
If you’ve secured the needed amount, you can start saving money to pay back any debt, including student loans and mortgages. This way, instead of paying it back monthly, you can pay all your debts at once and start planning for retirement sooner, or even dip your hand in investing.
Steps to implement the rule
First things first
Before anything, list down all your expenses and split them into the appropriate categories. It is important to remember that there is a gray area between each person’s primary needs and wants, as the two often overlap.
A tip is to put the non-negotiable payments into your primary needs and the rest, such as your movies and music subscription, into your thirty percent. Another tip is to continuously put your best efforts into living a contented life to make sure your needs don’t exceed the amount you can afford.
Fractions of your income
The next step is where you actually use the 50/30/20 rule. All you need to do is multiply your salary by 0.5 (for needs), 0.3 (for wants), and 0.2 (for savings). The numbers you get will indicate the ideal amount of spending you should have for each category.
Implement the knowledge
The last step is to combine all your calculations into a budget plan. More than making the plan, though, the most important thing is to actually follow and continue to commit to it as you go. Another handy tip is to invest a few minutes of your day into reviewing the expenses you’ve made throughout the day to ensure you’re on track.
Having said that, rules are still there to break (maybe not too much, though). So, as you adopt this method, remember to take it with a grain of salt and adjust as you go. The main point of the rule is to exercise planning an appropriate budget and committing to it. Good luck and all the best!
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