Budgeting has long been known as a key way to ensure your expenses don’t outweigh your income. However, despite its benefits, only about one-third of Americans maintain a household budget1. While the reasons for this vary, one could argue that a lack of financial education in our grade school years could potentially lead to poor spending and saving habits in adulthood. In fact, a 2017 report by MarketWatch found that half of American households live paycheck to paycheck.2 According to the report, approximately 20 percent of Americans have no emergency fund, and about 50 percent are “concerned, anxious or fearful about their current financial well-being.”2
While the concept of documenting every single expense you have over the course of an entire month and creating a comprehensive family budget may sound overwhelming (and unachievable) at first, there is a simple solution to help ease your fears — it’s called the 50/20/30 budget rule. A fairly simple formula, this rule provides you with some structure to your spending and saving, making it easier to get a clear picture of how much money is going out each month, as well as where it is going.
The 50/20/20/10 Rule: How It Works
The 50/20/30 budget rule is often referred to because it’s quite simple to follow.
According to the rule:
50: Half of your income (50 percent) should be allocated for living expenses and essentials, such as rent and groceries.
20: Twenty percent of your income should go to savings, investments and any debt you owe.
20: Twenty percent of your income should go towards everything you want, but don’t necessarily need.
10: Ten percent should be given to charities that you have carefully researched.
An important note: the essential and flexible spending percentages are the maximum; you always want to try to go below the recommended percent if you can except for your charitable giving which should be a minimum of 10 percent. Obviously, the things in your “want” category are going to be what you want to limit the most; essentials and savings (in most cases) should take precedence. However, everyone has their preferred spending method according to what financial objectives they have.
Implementing the 50/20/20/10 Budget Rule
Now that you know what the 50/20/20/10 budget rule is, it’s time to execute it. To start, take a look at your pay stubs to determine the exact amount of money you make every month. This amount will then be used as the foundation for your budget. If you’re self-employed, be sure to be extremely detail-oriented when it comes to tracking your income versus your expenses, and don't forget about putting aside a portion of revenue for taxes.
Once you know how much money you bring home each month, it’s time to track all of the bills, items and experiences you pay for every month. From your early morning Starbucks coffee to your water bill, you want to have a detailed list of everything you’re spending money on. One easy place to get this information is from your credit card company. Most credit card companies are able to create a report of your spending for the last 12 months. After that’s done, create categories, or buckets, according to the 50/20/2010 budget rule and put each expense into its corresponding bucket.
This exercise will provide you with a clear visual of your spending so you can have a better idea of what improvements need to take place. While it may seem like a hassle at first, eventually, as you adjust your spending and saving habits, you’ll realize how helpful the rule is for not only your future, but also your peace of mind.
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