Financial IQ May 11 2018

The Golden Rule of Budgeting

Buying a home is a momentous and exciting investment, but it’s one that usually comes with anticipated sacrifices. Namely, budgeting. It can be an overwhelming learning experience if you don’t strategize properly. So, what is the best way to structure your saving and spending when you don’t have much experience in the world of personal finance? Fear not — the 50/30/20 rule is a proven framework that can help you keep your spending in alignment with your savings goals. The beauty of their rule is that it is a simple way for novice savers to learn saving techniques, while also providing a certain amount of flexibility. An inflexible budget is one that will likely fail. Novice savers need a consistent plan with clearly outlined steps, but one that also allows other financial goals — outside of the mortgage — to be achieved.

So what exactly is the principle behind the 50/30/20 budget?

The 50/20/30 numbers are a percentage breakdown of how much you can safely spend, and how much you need to save, to maintain a comfortable financial balance. In general, under the rule:

  • 50% of your income should be set aside for Essentials
  • 30% of your income is for Personal spending
  • 20% of your income goes straight into Savings

Essentials include unavoidable living expenses such as rent, utilities, groceries, and transport. Minimum credit card and car payments also qualify as a need. Extra payments are filed under “Savings.” The Savings category encompasses costs such as investments, credit card payments, emergency funds, and retirement accounts. Personal spending refers to all the non-essential expenses that you desire but can actually live without if necessary.

When getting started with the 50/30/20 budget, the key steps are to:

  • Identify your income
  • Track your spending
  • Divide spending into Essentials, Savings, and Personal
  • Adjust your spending to fit within the 50/30/20 parameters

Once the 50/30/20 budget is properly calibrated, which may take a month or two as “Personal” spending is adjusted, people generally find that they have a plan in place that provides long-term, reliable results with minimal stress — a well-lit path to financial stability. The 50/30/20 rule is a proven model for inexperienced savers. But as with any budget, it does require discipline. When identifying ways to manage your spending while committed to a mortgage, it’s essential that the savings plan has the right balance of responsibility and freedom. That’s the versatility the 50/30/20 budget offers and it’s the reason it’s a dependable success for so many rookie homeowners.  

Sources: www.forbes.com blog.mint.com www.thebalance.com  

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