Budgeting has long been known as a key way to ensure your expenses don’t outweigh your income. However, despite its benefits, only about one-third of Americans maintain a household budget1. While the reasons for this vary, one could argue that a lack of financial education in our grade school years could potentially lead to poor spending and saving habits in adulthood. In fact, a 2017 report by MarketWatch found that half of American households live paycheck to paycheck.2 According to the report, approximately 20 percent of Americans have no emergency fund, and about 50 percent are “concerned, anxious or fearful about their current financial well-being.”2
While the concept of documenting every single expense you have over the course of an entire month and creating a comprehensive family budget may sound overwhelming (and unachievable) at first, there is a simple solution to help ease your fears — it’s called the 50/20/30 budget rule. A fairly simple formula, this rule provides you with some structure to your spending and saving, making it easier to get a clear picture of how much money is going out each month, as well as where it is going.
The 50/20/30 Rule: How It Works
The 50/20/30 budget rule is often referred to because it’s quite simple to follow.
According to the rule:
50: Half of your income (50 percent) should be allocated for living expenses and essentials, such as rent and groceries.
20: Twenty percent of your income should go to savings, investments and any debt you owe.
30: Thirty percent of your income should go towards everything you want, but don’t necessarily need.
An important note: the essential and flexible spending percentages are the maximum; you always want to try to go below the recommended percent if you can. Obviously, the things in your “want” category are going to be what you want to limit the most; essentials and savings (in most cases) should take precedence. However, everyone has their preferred spending method according to what financial objectives they have.
Implementing the 50/20/30 Budget Rule
Now that you know what the 50/20/30 budget rule is, it’s time to execute it. To start, take a look at your pay stubs to determine the exact amount of money you make every month. This amount will then be used as the foundation for your budget. If you’re self-employed, be sure to be extremely detail-oriented when it comes to tracking your income versus your expenses, and don't forget about putting aside a portion of revenue for taxes.
Once you know how much money you bring home each month, it’s time to track all of the bills, items and experiences you pay for every month. From your early morning Starbucks coffee to your water bill, you want to have a detailed list of everything you’re spending money on. After that’s done, create categories according to the 50/20/30 budget rule and put each expense into its corresponding bucket.
This exercise will provide you with a clear visual of your spending so you can have a better idea of what improvements need to take place. While it may seem like a hassle at first, eventually, as you adjust your spending and saving habits, you’ll realize how helpful the rule is for not only your future, but also your peace of mind.
At Sorensen Wealth Management in Westlake Village CA, we know how important it is to have a plan and a direction. That's whey we encourage our clients to create a budget by tracking their actual expenses. This may help mitigate wasteful unnecessary spending. The 50/20/30 is a great tool for those less detailed and can be followed easily. Once we know the spending, we can help prepare a cash flow analysis. It's all part of our process. It's what we do and we do it well. Maybe it's time for you to review your spending, look at your investments and put a plan together or review your current one? We can help-just reach out and let's set up a meeting.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.