The 50/30/20 Formula
February 4, 2020
The path to achieving financial wellness starts by inverting the equation of ‘income minus expenses’ into ‘ income minus savings’.
Does moulding your money habits seem too overwhelming? Does thinking of how to build a road towards the future and get started makes you feel at the end of your wit? You don’t need to grasp at the straws anymore with this budgeting trick!
The 50/30/20 Formula
The 50-30-20 budgeting rule suggests the division of income after taxes into obligations, goals and splurges.
50% of your income – “Must-Haves”
Warren Buffet calls the Must-haves, “ the heart of your Balanced Money plan”. This section of your income is dedicated to fulfilling all your basic needs which are crucial for your survival. These are the expenditures you need to incur on a day-to-day basis. It also includes minimum payments you need to make on your debts. Such payments may include groceries, utilities, housing, car payments, etc.
30% of your income – “Wants”
Expenditure on items that fall in this category is a choice. The main aim of such expenses is up-gradation of your lifestyle. For instance, buying a Mercedes instead of a more economical Honda.
This 30% bucket includes vacations, entertainment, gym fees, hobbies, pets, eating out, cell-phone plans, and cable packages. These are things you don’t really need to get by. A want for some people might be a need for others. For example, some might have photography as a hobby and some might want to pursue it as a career. So such people might spend more on photographic equipment and lessons.
20% of your income – “Savings”
The remaining 20% of your savings goes to an often overlooked part of your income: your financial goals. This includes debt savings and investments.
Save 20% of my income? That’s impossible!
Getting your expenditures into the right bracket and balancing your income in these exact proportions might not be possible for you immediately. There might be a real circumstance preventing you from hitting the right equation.
If yes, then hold on to this key: If you can’t get your money in the exact balance, get as close as you can!
If not 20% of savings, then can you save 15% of your savings? If you can’t bring down your obligatory expenditures to 50%, then can you bring it down to 55%? A 55-30-15 plan is better than a 60-40-0 plan.
Make Adjustments where Needed.
Granted, the 50/30/20 plan isn’t the only percentage-based budget. All percentage-oriented budgets are entirely customizable.
The percentages you set are adjustable based on your fluctuating income. Perhaps a 60/20/20 or 40/20/40 works best for you. If you just got a raise, for instance, you might be able to focus more on paying off your debt. But, if your rent rates have risen, it could mean cutting back on the amount you set aside for your “wants”.
Hence, look at your existing finances to set a plan for the long term! You can tweak and revise your spending/saving categories according to your current earnings and lifestyle, allowing your budget to do justice to your current financial situation.