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. It's a proportion guideline. Laura Shin, for Learnvest, explains that this rule can help everyone from single parents to new college grads create a workable household budget
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.
Essentials are the expenses you would probably have, regardless of where you lived, where you worked, or what your future plans happened to be. They are nearly the same for everyone. Housing, food, transportation, and utilities fall into this category. The percentage lets you adjust and still keep a sound budget. Where some live in high-rent areas but can walk to work, others enjoy much lower housing but higher transportation costs.
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.
Financial obligations are your savings contributions, such as retirement and emergency savings, and debt reduction. This is your "get ahead" category. Where 50% of your income or less is the goal for essentials, 20% or more should be the goal with obligations. You'll pay off debt and make strides toward your future with a heavy concentration here.
Retirement might not seem critical when you're 24, but it will be in years to come. And the advantage of starting early is that it all earns interest for years.
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.
Personal lifestyle choice obligations include your cell phone, cable, and Internet plans. If you travel extensively, your cell phone plan is probably not a luxury, but a necessity for doing business. However, you can control which plan you've got. Gym memberships and dining out are also in this category. Only you can decide what belongs here, and what doesn't. As with essential expenses, 30% should be the top end; spend less, and you'll make more progress.
Your 20s are a period of a lot of trial, a lot of error. They can also be a time when you establish good habits that last a lifetime. You don't need a high income to use the 50/20/30 rule. Since it's percentage-based, the same proportions can, and do, apply, whether you're earning entry-level pay and living in a studio apartment, or earning a lot more and buying your first house.
Try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else's. What it gives is a framework for you to work within. Once you review your income and expenses, and determine what's essential and what's not, then you can create a budget that makes the most of your money. And 20 years from now, you can still fall back on the same guidelines to help your budget evolve as you do.
Mint.com has budget software that can help you use the 50/20/30 rule to its fullest. After a quick setup, you can create your very first budget and keep track of it every day. When your situation changes, Mint lets you adjust so your budget can change with you.
Sign up for your free account today, and make your 20s the decade when you set a strong foundation for the future.