There’s no question that following a budget is a great way to help you meet your financial goals. But how do you decide the best way to allocate your money? Here’s a quick breakdown of three basic budgeting rules that can help you make budgeting easier. Personal finance is all about what works best for you, so consider each rule and pick the one that makes the most sense for your household.
1. The 50/30/20 Rule
The 50/30/20 rule is a streamlined plan for anyone looking to spend and save responsibly. This rule recommends that you spend 50% of your post-tax income on necessities (housing, food, utilities, transportation, insurance, childcare); and 30% on wants (travel, gym memberships, cable, dining out, etc.). The final 20% is put towards savings, including paying down debt, making retirement contributions and building your emergency fund.1 Following this simple rule helps make sure the important things are taken care of while also carving out wiggle room for the things that you enjoy most.
2. The 80/20 Rule
If you think you might fare better following an even simpler plan, consider the 80/20 rule as another option. A stripped-down version of the 50/30/20 rule, this budget advises setting aside 20% of your income for savings and using the remaining 80% for both necessities and luxuries.2 Some people prefer this breakdown because they don’t have to differentiate between wants and needs. After all, the line between those two categories can blur (for example, a new coat could be considered essential or a fun splurge). So, with the 80/20 rule, you don’t have to track categories of expenses quite as closely. To get started, consider setting up automated contributions so that 20% of your income goes right into your IRA, 401(k) or other savings accounts.2
3. The 50/15/5 Rule
If you’re at a stage in life where you’re balancing multiple financial goals—maybe you’re saving for retirement and your children’s education, and even thinking about a new car, too—you may prefer the 50/15/5 rule. This model suggests allocating 50% of your income to essential expenses, 15% to retirement savings and 5% to an emergency fund.3 This plan allows you to meet your immediate needs and plan for the future before you spend on anything else.
Of course, you don’t need to be a math whiz to realize that those figures don’t add up to 100%. That’s because the 50/15/5 rule builds in the assumption that it’s best for you to decide how the rest of your money will be spent each month. You can contribute additional cash to your retirement accounts, save up for that new car, or put it into a vacation fund. That final 30% is all about financial freedom.
Setting a budget will put you on a firm path towards meeting your financial goals, and each of these rules is a great framework to get you started. Just choose the one that sounds like the best fit for you and remember, when it comes to budgeting, consistency is key.
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