No matter if you are rich or poor, it is necessary to have a budget in order to have a successful financial future.
Having a budget doesn't mean you have to live a boring lifestyle. Budgeting is simply just giving your money a plan of action that will set you up for success.
Considering that most Americans have a high level of bad debt, it is important to develop a plan to help prepare you for your future.
Budgeting can help you replenish your savings, help you get organized with your bills, and assist you with your investing journey.
With that being said, there is a ton of financial information out there, so a lot of people get confused and overwhelmed and do not know where to start.
A simple financial practice for people who don't know where to start is the 50/30/20 Rule.
What is the 50/30/20 Rule?
The 50/30/20 rule is actually pretty simple.
The rule states to take your after-tax income and split it into three separate categories.
- 50% for Needs
- 30% for Wants
- 20% for Savings/Investments
These budgeting categories are important to understand. The goal is to keep more money in your pocket and stop wasteful spending. It is a simple strategy, but it works and it will help you reach your financial goals if you are struggling.
Now, you might be wondering what actually falls under these categories.
50% For Needs
Everyone has bills to pay each month, that's called being an adult. Needs are bills and payments you have that are necessary for your survival.
This includes mortgage or rent payments, car payments, travel expenses, groceries, and utilities. This doesn't include extras such as TV or eating out.
50% of your income should be enough to cover your needs in life. If you find yourself spending more than that then you may have to make some lifestyle changes. Sometimes having "too much house" or "too much car" can get people into financial trouble.
If that doesn't help, you may need to find ways to make more money.
30% For Wants
Life is short, yet life is also long.
You only live once, so it is important to enjoy your time on this earth too.
Wants are the items and services you spend your money on that are not absolutely necessary for your survival.
This includes activities such as the movies, the bars, or your favorite sporting event.
This also includes going out to eat at your favorite fancy restaurant. Yes, it is okay to indulge in your favorite foods and drinks from time to time.
Don't let these budget gurus keep you from enjoying your life.
These items could also be new clothing, a nice necklace, or even a dirt bike or ATV.
These wants are important because they make life more enjoyable and exciting. If you have the money and can fit these items in your budget then there is no reason why you cannot enjoy them.
20% for Savings/Investments
As mentioned earlier, life is short, but it is also very long. As time goes on you are going to want to work less and eventually have money to retire on.
That it why it is absolutely essential to save and invest your money.
Too many people are broke due to their lack of saving and investing and sometimes even do the opposite and end up with lots of bad debt.
Debt Repayment is also very important and may even fall under the "needs" category because you don't want to let that debt compound overtime and destroy you.
Your goal should be to get at least 20% of your income into a retirement account so it can compound overtime. Some of the easiest investing strategies are to either invest in mutual funds or set up a Roth IRA.
Is the 50/30/20 Rule for you?
Saving and preparing for the twists and turns that life throws our way is not fun, but it is essential for success.
This rule will not apply to everyone simply because everybody's financial situation is very different.
Some people make a lot of money, but don't know how to manage it. Others don't earn as much and are seeking ways to improve their situation.
With that being said, I believe that this rule can help people who are looking for some financial structure.
The 50/30/20 rule will help you build good financial habits while also helping you get your feet wet in the investing world.
You may not be able to follow this to the exact percentage, but it can be used as a sound starting point that will assist you on your decision making.
No matter what you decide to do, remember this:
Having a budget and a plan for your money will help you get organized while also allowing you to enjoy your life.