In the following article we want you to know a very effective method to make a budget and save a lot of money. The 50-30-20 rule.
If you follow the content of Modoemprendedor, you will know that on numerous occasions we have talked about the importance of creating a budgethave a emergency fund Y save to invest. These types of activities allow you to manage your money efficiently and maintain control of expenses.
The 50-30-20 rule allows you to do all of this very easily. Why?
Common budgeting methods involve creating detailed categories to allocate certain percentages of money to each. This implies that you must continuously and rigorously monitor your expenses.
The 50-30-20 rule is a great tool for those who don’t want to be so rigorous when it comes to managing their money or just don’t think they have the time to do it, but care about it.
What is the 50-30-20 rule?
The 50-30-20 rule turns out to be one of the best and most popular tools for people who don’t have the time to keep track of all their spending, but want an easy way to manage it.
This rule became famous, thanks to Elizabeth Warren, who popularized this term in her book “All Your Worth: The Ultimate Lifetime Money Plan.”
This method only requires you to track and divide your expenses into three main categories: needs, wants and savings/debt. Being such broad categories reduces the amount of time you have to spend detailing your finances, allowing you to focus more on the big picture.
Let’s take a closer look at these categories.
Needs (50% of your monthly income).
Necessities are those obligations that you absolutely must pay and are necessary for your subsistence. They are those things without which you could not live. These include:
– Housing (Rent, loan, mortgage).
– Food.
– Public services.
– Transportation.
– Health.
– Dress.
Items in this category should only be “must haves”. The “necessities” category does not include items like Netflix, cell phone bill, coffee at Starbucks, or other unnecessary expenses.
Half of your income should be used to cover your basic needs and obligations. If you are spending more than 50% on your needs, you will have to reevaluate if you are including some things that don’t really belong in this category or if you are paying more than you should.
Remember that you can always find cheaper options or reduce your lifestyle. You can probably drive a smaller car, ride a bike, cook at home more often, or live in less expensive property.
Before including an expense in this category ask yourself: can I live without this? If the answer is yes, does not belong to your needs.
Wishes (30% of your monthly income).
The 50-30-20 rule stipulates that you must allocate 30% of your income in this category. Wants are all the things you spend money on but are not absolutely essential. It’s what you want but don’t need to survive. This includes:
– Holidays.
– Entertainment (Cinema, meals away from home, theater, concerts, parties, events).
– Hobbies (Money that you spend on sports or extra activities that you practice).
– Technology (A new phone/laptop/tablet/TV/, car, drone, etc).
– Subscriptions (Gyms, streaming services like Netflix, magazines, etc.)
Remember that everything in this category is optional. You can exercise at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of buying game tickets. You can use the bicycle instead of going by car, you can always have a cheaper phone plan or an internet plan with lower speed.
Basically, wishes are all those little extras that you spend money on, that make life more enjoyable and entertaining; but they are not essential for your subsistence.
Savings/Debts (20% of your monthly income).
As its name implies Savings/Debts covers two main areas. In the first instance, this category is intended for saving money for investment, for the creation of an emergency fund (Three months of income) and pension contributions. Finally, the money that you include in this category must be used to pay debts.
When referring to the payment of debts, it is necessary to make the following clarification. The only type of debt that should be included in this category is one that exceeds the minimum payments on your financial obligations. That is, the additional payments to pay your credit card or mortgage faster are the ones that must be added here.
Any monthly fixed minimum payments you have should be included in the “Needs” category. The reason for this reasoning is that the required minimum payments are mandatory. Not complying would cause adverse effects on your credit status, something you cannot allow.
*Note: It is important to clarify that the percentages 50%, 30%, 20% do not imply that you should spend that monthly amount. They are just a measure to take into account to know the maximum amount of money you should spend. If you can spend less and move those funds to the Savings/Debt category, that would be much better.
In the case of this category, 20% is a reference for the minimum amount of money that you should be contributing to your savings and prompt payment of your debts. That is, 50% (Needs) and 30% (Wants) are the maximum amount of money you should spend in these categories and 20% (Savings) is the minimum investment in your savings.*
How to use the 50-30-20 rule?
Most people save too little and spend too much. The worst thing is that they are not aware of this behavior.
The 50-30-20 rule is a way to learn about your financial habits, limiting overspending and undersaving. By spending less on non-essentials, you have the opportunity to save more for things that are important. To use this rule follow the steps below.
1. Calculate your monthly income: Determine how much money you receive in total each month. Remember that this sum represents your net salary, that is, after taxes.
2. Calculate the spending threshold for each category: Multiply your take-home pay by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals). This way you will know how much money you should allocate to each category.
3. Plan your budget: Think of these three categories as “buckets” that you can fill with your monthly expenses. List and count your monthly expenses in the category each one falls under and see if you are spending less/more than the monthly goals you set in the previous step. If you spend more you must make the necessary corrections.
4. Track your finances: Monitor your expenses month by month. It is of vital importance that you pay attention to the movements of money that you make to know if you are complying with the budget plan that you made in the previous step.
Why use the 50-30-20 rule?
This ruler is a great option because it allows you to easily keep track of your spending. Having only three categories creates a structure that is easy to follow and helps you focus and better manage your money.
Being less detailed, it is ideal for people who have very busy lifestyles and minimal available time during the day. This rule works very well for people with lower incomes.
However, it is not ideal for high income people because they would be forced to spend unnecessary money on their necessities. The 50-30-20 rule has helped many people get their finances on track. Many financial experts trust this rule.
Also, lots of people who have been in horrible financial ruts have gotten out of it by following this guide. You can be one of them if you apply it today.
Conclusion:
Having control of your finances can become confusing confusing. That’s one of the reasons the 50-30-20 rule works so well. It’s an easy way to handle something that can otherwise be intimidating.
Saving is hard, and life often throws unexpected expenses at us. By following this rule, you will be able to have a plan for how you should manage your income. If you find that your spending on wishes is more than 20%, you can find ways to reduce these spending and direct these funds to more important areas.
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And remember, if you are really interested in creating your own business, you can read our book “How to create a company while working: Discover how to manage your time, manage your money and motivate yourself while creating a company and working for another” , where you will find all the information you need to found your own company, without having to leave your job.
