We normally plan on how to use our monthly income judiciously, but end up wasting our money even before we’re being paid. How to budget your income is really important if you’ve never thought of it. The 50/20/30 rule is a budgeting technique that breaks your income into: 50 percent for your necessities, 20 percent for your financial goals, and 30 percent for leisure and lifestyle.
Related media: What Is 50/20/30 Rule?
How Do I Plan A Budget?
A budget is simply a plan on how to spend money efficiently, with each task or item having a specific allocated fund; and if you don’t have a monthly budget, you better plan one right away. The 50/20/30 rule makes it pretty easy.
This rule let’s you allocate 50 percent of your income on basic necessities, such as rent or mortgage, household utilities, food and groceries. Some people may include tuition, clothing, and transportation as their preference. While others may include leisure and lifestyle — the way you choose your preference is solely up to you.
Next, you allocate 20 percent of your income on your finances, such as savings and investments, savings for retirement, investment portfolios, payments including your credit card debts, or saving up for a vacation. Here’s where you plan for the future with your income.
Finally, you allocate the remaining 30 percent of your income on the stuff you want, otherwise known as leisure or lifestyle choices. These can vary from time to time. These include shopping, entertainment, gym fees, hobbies, and petty expenses, plus food, clothing, and transportation — if you didn’t include them in your necessities.
Everyone Can Try It
Senator Elizabeth Warren and her daughter Amelia Warren Tyagi made the 50/20/30 rule popular in their book “All Your Worth.” There are so many budgeting strategies and in more recent times apps that assist you plan one. Financial experts say this rule is a good plan for starters. Senator Warren and Warren Tyagi call it the “balanced money formula,” since it’s pretty simple to get in use.
They even explained that there is no need to stick to the rule strictly; you can make adjustments based on your preference and necessities that arise. The budgeting is up to you to decide; whether 50/30/20; or 50/25/25; or even 30/30/30; then the remaining 10 … ? That’s all up to you to decide. But always remember you must have a budget.
If You Fail To Plan, You Plan To Fail
In a 2018 study published by the University of Illinois, many young people lack financial literacy and money-management skills, indicating an urgent need for educational programs to help them enter adulthood better equipped to handle their financial affairs. Only 22 percent of the 18-to-24-year-olds in the study sample were deemed to be financially stable, according to led author Gaurav Sinha, a graduate student in social work at the University of Illinois.
Nearly a third of young adults in the study were found to be ‘financially precarious,’ and about 36 percent of the people in the study were deemed to be ‘financially at risk’ because they had experienced a significant, unexpected drop in income during the prior year.
The financially precarious group, comprising 32 percent of the sample, “had the poorest actual and perceived financial literacy,” Sinha said. “Because they lacked access to mainstream financial institutions, they were frequent users of alternative financial services, which tend to charge high interest rates and fees.”
This raises an urgent need for an effective budgeting strategy for most young individuals. If you plan on starting a budget, we suggest the 50/20/30 rule.
As Senator Warren and Warren Tyagi explain its “the right place for most people most of the time, and it is a good place to aim for in your lifetime money plan.”
Read more facts like this one in your inbox. Sign up for our daily email here.
The Factionary is ever ready to provide you with more interesting content for your reading pleasure. If you’re amazed by our work, you can support us on Patreon with a donation fee of your choice. Thank you!
Written by: Nana Kwadwo, Wed, Dec 26, 2018.
4 comments