Budgets are more than just paying your bills on time. But determining how much you should be spending where isn’t so easy. The 50/20/30 rule is the minimalist’s way to finding a good track and staying on it.
While not everyone can, or will, adhere to this “rule” strictly, it’s especially helpful for people with little financial experience — those just starting out in life. When you know what equals a somewhat balanced budget, you can create your own around it and still be on a good path.
The 50/20/30 rule can help twenty-somethings sort out the complicated world of personal finance. Get into this habit, and budgeting will be simpler throughout life. You’ll make adjustments, with a tweak here and a nudge there. But when you stay close, you’ll gain ground, not lose it.
50% of Your Income — Essentials
With this rule, 50% of your income (or less) should go toward paying for the absolute necessities of life — your essential expenses. This might seem like a high percentage, half your money right off the top, but once you consider what falls into this category, it makes a bit more sense.
20% of Your Income — Financial Obligations
The next 20% of your take-home pay should be directed toward those things you must do, but wouldn’t die or be homeless if you didn’t. That’s an oversimplification, of course. This category should be paid after essentials, and before moving on to the last category.
30% of Your Income — Personal Choices
The last category, and the one where you can make the most difference in your budget, is voluntary obligations that enhance your lifestyle. Some financial experts consider this category completely discretionary, but some of these so-called luxuries have taken on a mandatory status. It all depends on what you want, and are willing to sacrifice. The reason it’s a larger percentage than your obligations is because so much falls into it.
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