Does it seem like you have a love-hate relationship with money and it never seems to stick with you? Despite knowing that you’re supposed to budget and use your money wisely, you still run out of cash before mid-month. Well, you’re not alone.
Many people are in a cycle of debt because they pay their debts then borrow again immediately, and the trend continues. You have read all the books you can about getting out of debt, but the ideas seem so far-fetched. This kind of living can be draining and make you give up on ever being financially stable.
However, all hope is not lost, and it’s not too late to learn a new money management approach. What if you discovered a financial planning rule that saves you from ever having to worry about money? While there’s no one-size-fits-all approach to money management, this financial rule can warm your relationship with money.
Here Comes the 50-30-20 Rule
According to Senator Elizabeth Warren, the 50-30-20 rule should form a big part of your ultimate lifetime money plan. The rule is a guide as to how you should divide your money after tax deductions.
It’s an easy budgeting plan that caters for needs, wants, and savings, unlike other financial plans. If followed with dedication, the rule can help you reach your financial goals and save for retirement.
Allocate 50% to Your Needs
Elizabeth classifies needs as those bills that must be paid for survival. They’re those things you can’t do without and include rent or mortgage, groceries, insurance, healthcare, and utilities. It also should include your minimum debt payment amount as it’s a must-pay expense.
Expenses that you can live without like Netflix, Starbucks, and dining out shouldn’t be included here. She continues to say that half of your income after tax should be enough to meet these must-haves. If this amount doesn’t cover these obligations, it indicates that you’re spending more than you can afford.
It would help if you considered downsizing your lifestyle by probably moving to a smaller house or buying a smaller car. Depending on how far above the 50% mark you’re in your expenditure, you may want to use public transportation to work. If you eat out a lot often, cooking at home could save you some good money.
30% Goes to Your Wants
Do you ever practically budget for your wants? Think of those new shoes and handbags, the movie tickets, vacations, electronic gadgets, and ultra-high-speed internet. Had you planned to buy them or did you acquire them on a whim?
Anything you buy on impulse is probably not a necessity and should be factored in on the wants list. To help you further, take note of all the things you can substitute or postpone having. If you can exercise from home instead of going to the gym, that subscription to a fitness club is a want.
In this category also falls all the upgrades you want for your home. Ensure you capture all those little extras you spend money on to enhance your life.
Always Save 20% of Your Disposable Income
If you want to be financially stable, save and invest the remaining 20% of your income. Take steps to allocate money to an emergency fund in a savings account. Consider investing in the stock market or saving in a pension fund.
In doing this, think long-term; if you lose your job, you should have three months of emergency savings to sustain you. Your savings should also help you with your big financial goals down the road.
They should also cover debt repayment. Minimum payments fall under the needs category, but any extra payment to the principal amount should fall under savings.
Take note that if you ever use the funds in the emergency fund, you should replenish it as soon as possible.
Why is Savings Important?
A large part of the population is poor at saving, and they have huge debts. The 50-30-20 rule is designed to help an individual manage their income after tax. The most significant part is ensuring they have a fund for emergencies, and they save for retirement. It's ideal for every household to prioritize having an emergency fund to cater for unexpected medical expenses and other costs.
Saving For Retirement
Saving for retirement is also crucial as one is less likely to have a sustainable source of income then. Fewer companies now offer full pension plans for their employees. Coupled with the uncertainty of Social Security, it’s only wise that you plan for your retirement early enough.
Unfortunately, many people feel that they don't have extra cash to put away each month. That is a costly mistake that you should avoid while you still can.
Little Savings Add Up to Much
Start small and take steps towards this goal, no matter how insignificant. Calculate how much you’ll need for retirement and start saving for it while you’re still young. Remember the power of compound interest as explained on Pigly.com and the difference it can make on your savings.
To be successful in this quest, consider retirement savings as a priority and not an afterthought. You can take advantage of the attractive retirement plans by the Internal Revenue Service. They include the individual retirement accounts, 401(k) plans, and special retirement accounts for the self-employed.
When you have any of these accounts, you’re entitled to tax deductions, tax-free earnings, and credits. With all these long-term benefits, it’s time to consider saving for retirement if you’re yet to make this crucial commitment.
With all this in mind, remember that your relationship with money is evolving. While responsibilities and commitment increase as you grow older, your appetite for money also increases. Unfortunately, many people operate in a realm of limited financial knowledge.
If you’ve tried all the rules in the book on financial management and haven’t succeeded, it's time for the 50-30-20 rule. When properly implemented, this rule will see you cater to your needs, wants, and future emergencies without strain. It might be demanding and challenging at first, but it'll save you a great deal as you commit to it.