It is no secret that budgeting is a key way to ensure your expenses do not outpace your income, this has been known as a fundamental element and key puzzle piece to achieving financial success for a long time. However, despite the proven benefits, only about one-third of Americans maintain a household budget.1 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 idea of building a budget and documenting every single expense you have over the course of an entire month and creating a comprehensive family budget may sound unachievable (and quite honestly overwhelming) at first, the good news is, we have 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 a three part structure to your spending and saving, making it easier to get a clear picture of how much money is walking out the door 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 as stated earlier, it’s quite simple to follow.
According to the rule:
50: Half of your income (50 percent, or less) should be allocated for living expenses and essentials, such as rent and groceries.
20: Twenty percent (or more) of your income should go to savings, investments and any debt you owe.
30: Thirty percent (or less) of your income should go towards everything you want, but don’t necessarily need.
An important note: the essential (50) and flexible (30) spending percentages are the maximum; you always want to try to stay 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 their own beliefs and financial objectives.
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 take home every month. This amount is the amount printed on your paycheck or deposited into your bank account through direct deposit. This is very important because gross pay can be a drastically different number from your take home pay (net). 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 group.
Everything you need to know about getting your financial house in order is within this process. 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. It's not fun but it is important. Eventually, as you adjust your spending and saving habits, you’ll realize how helpful the rule is for not only your future fiances, but also your peace of mind.
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||About the Author
James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here.
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