The budget is not simply a recording of income and expenditure. It is a tool that helps you manage your income and financial life. The 50/30/20 rule budget only requires you to track and divide your expenses into three main categories: needs, wants, and savings or debt. This reduces the amount of time you have to spend detailing your finances and allows you to focus more on the big picture instead.
According to this thumb rule:
- 50 percent of the earnings after tax should be used towards necessities.
- 30 percent of the money should be spent on luxuries or wants / desires.
- 20 percent money should be saved and invested towards your financial goals.
- Emergency Fund - your minimum 6 months expenses or minimum 3 months salary.
The 50/30/20 rules
This rule defines the amount to be allocated to different things in the budget -
50% of your income - requirements
Allocate 50% of your income towards your basic needs - food, housing, utilities, healthcare, transportation and insurance. The amount spent on each of these can be flexible.
30% of your income - wants
You may have certain hobbies and want to have a certain lifestyle. You can allocate 30% of your income for entertainment and hobbies. This may include dining out, travel and other indulgence. Some people may need the will of others.
20% of your income - financial goals
20% of your income should be used for financial goals. You will have to allocate this amount for savings and investment. You have to take care of your retirement and maintain an emergency fund. You may have a loan to pay. You can have financial commitments and future goals.
Emergency Fund
An emergency fund is a financial security for future accidents and / or unexpected expenses. Financial planners recommend that emergency funds should generally hold at least 6 months of expenses or a minimum of 3 months of salary in highly liquid assets.
How to use the 50/30/20 rule budget
The first thing you should do is calculate how much money you can allocate to your needs, wants and savings or debt. Suppose you calculated your subsequent income as $ 6,000 per month. In this case, you have $ 3,000 for requirements, $ 1,800 for want and $ 1,200 for savings and loans.
Now that you know how much you can spend in each category using the budget of the 50/30/20 rule, the question is which one has been spent in each category. You have to use a little discretion in determining what fits each category, but here are some general guidelines to follow.
Requirements are the expenses that you should keep in your budget no matter what. These include such things as housing, utilities, transportation and health care expenses; At least the minimum payment on your loans; And the bare minimum for basic clothing and supplies.
Those are the expenses you choose to spend your money on but you do not have to live your life. This category includes expenses such as eating out, alcohol, cable TV, internet, shopping trips, holidays, membership, membership, gifts, entertainment and other luxuries.
It is easy to confuse many needs. A simple way to determine if something is needed or to ask is whether you can live without it. If you can, it is a necessity, not a requirement.
For the case of Emergency fund, based on above income statement, you need minimum 6 months expenses i.e. $3000×6 = $18000 or minimum 3 months salary i.e. $6000×3 = $18000 in savings account or any other assets which easily accessible when it required.
Finally, the savings or loan category is the money you set for your future or pay off the loan faster than necessary. You can use this money to create an emergency fund, save for a down payment at home, invest for retirement, or pay off your student loan or credit card faster than needed. are doing.
If you want to save money more quickly, you will have to set aside some of your desired money for additional savings.
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