Modern Money: The 50-20-30 Rule and Why It Works for Today’s Budgets

Modern Money: The 50-20-30 Rule and Why It Works for Today's Budgets

Modern Money: The 50-20-30 Rule and Why It Works for Today’s Budgets | brokeGIRLrich

If you are finding it a regular struggle to balance your monthly finances and would like a bit of general guidance on how to work out which areas of your spending need trimming, there is an old rule that still has plenty of relevance in a modern money environment.

The 50-20-30 rule can be an excellent way of showing you how to spend your monthly income in the right proportions and give you the discipline you might need to get your finances on the right track.

Here is a look at what is behind the rule and how to apply the same approach to your own monthly finances. There is an overview of how to allocate your spending, how to interpret the results, and why a bit of flexibility with the rules is no bad thing.

A Simple Formula

You should be reassured to learn that in most cases budgeting doesn’t have to be anywhere near as complicated as it seems at first glance, and despite the unique individuality of everyone’s own finances there is a simple formula that tends to universally work to put your spending into perspective.

It sometimes helps to have some basic guidance on how to decide what you spend your cash on and to understand why certain expenditure simply has to take priority over other areas of spending.

There are lots of savvy ways to get the best value and performance out of your spending habits, including to claim rewards for using your credit card, but one of the fundamentals of budgeting that you need to get to grips with is to work out exactly where your money is going each month.

That’s where the 50-30-20 rule can help.

Breaking Down the Percentages

The 50-30-20 rule is designed to help you budget better by using a method that suggests you put a defined percentage of your spending into three specific spending categories.

It is suggested that 50% of your income should be allocated towards living expenses and essential payments. The expenditure that should be in this category will be mortgage or rent payments, utilities, and what you spend each month on groceries and transportation costs.

The next 20% of your income should ideally be going towards financial goals. These include regular savings plans and debt-reduction payments, such as clearing your credit card debt over a defined period of time.

The final 30% of your income should be available for flexible spending. As it sounds, flexible spending can be anything like movies, restaurants, vacations, and anything else that could be classed as discretionary rather than essential spending.

Putting Your Finances Under the Microscope

The first thing to do if you want to see how your current spending matches up to the 50-20-30 rule is write down everything you spend on a monthly basis.

You can put the data into a spreadsheet if you prefer, but the main thing is to record every single item of spending, putting each entry into one of the three main categories.

Putting all of your spending under the spotlight and seeing exactly where your money goes each month should be an illuminating experience and it will give you a clear indication of where you might be overspending.

It should be remembered that the 50-20-30 rule is mainly designed as a guide to help you become more disciplined with your spending, so you can be a bit flexible with the rules and adjust the percentages slightly, especially if you end up spending slightly more of your income on essentials.

If you find your discretionary spending is way out of line and accounts for much more than 20% of your income, that should be a red flag that you need to make some adjustments to how you use your money each month.

It’s Not All About the Percentages

Don’t get too hung up on trying to fit your spending into the 50-20-30 rule, as it not just about trying to meet the exact percentages.

All personal budgets are going to be slightly different so you can’t expect a simple formula to fit neatly into everyone’s spending habits.

What it does do, however, is give you a sense of perspective and discipline with your spending so that you can find it easier to spot where you might be able to make some sensible adjustments.

The message to take on board from applying this rule to your budget is that if you are close to parity with the rule, you are improving your odds of covering your expenses and ensuring you are saving for the future too.

Grace Summers writes about personal finance. She herself (as a Mom with 3 kids) has tried many different methods to scrimp, save and control the monthly budget.

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