The ‘50/30/20 rule’ was coined by Elizabeth Warren, who was named as one of the 100 most influential people in the world by Times Magazine. If you want to create and begin your budget, then here are some recommendations on how to split your income.
Your After Tax Income
If you are self-employed then you will need to differentiate between your personal and business finances. You should then pay yourself a salary into your personal account from your business finances. If you are a commission earner, then this is useful as your business income might vary month to month. The personal income that you have in your private bank account will then be your normal salary and will be treated as such.
Track Your Money
You need to keep track of your spending for a month and write everything down. You need to keep track of all your home repayments and other bills as well as those smaller expenses like the morning coffee you get on the way to work, for instance, and so on.
Know Your Needs
Next is to differentiate between your needs and your wants. Your needs are the payments that you have to make that will impact your quality of life. For instance, you need a home, you need to eat and so on, so your need payments will be groceries, utility bills and housing.
Your car will also be a need, both the repayments and petrol as you use your car to get to and from work. If you don’t own a car, then you must include transport into your budget as a need.
If you have a credit card that is carrying a balance, then the minimum repayment that is required each month is classified as a need because if you miss a payment then your credit score is impacted negatively and you might be charged late fees.
The ‘50/30/20 rule’ states that 50% of your net income should be set aside for your needs.
Cap Your Wants at 30%
Your wants will include things like dining out, haircuts, DSTV, movies, clothing and so on. You may find that you are spending more on your wants than you think, which is why it is a good idea to write all of these down.
According to the rule, only 30% of your net income should be spent on your wants.
Have a Financial Goal and Save
You need to think about what you are saving for. Are you saving for retirement, your kids education, to be debt free? At least 20% of your income should be going towards your saving goals.
So Why Does the ‘50/30/20 Rule’ Work?
The rule keeps things simple and with your finances split into 3 categories with a maximum percentage attributed to them, you will know where your money is going each month. The rule is also flexible, for instance, if you spend less on your needs then you are able to save more, so you can make the plan work for you.
Maintaining consistency with your finances each month is by managing your money each month. With the rule, you can save for your future but also have enough to enjoy life now and have your needs covered.