What’s the best way to budget for living costs? While the internet easily could debate this question at length, there is a general rule that most experts agree on as a basic financial strategy. You might already be familiar with this formula: It’s the 50/30/20 rule.
Why, especially in a time of inflation, does the 50/30/20 still work as one of the best budgeting guidelines? Here’s how this strategy empowers individuals in every type of financial situation to budget for living costs.
How the 50/30/20 Rule Works
The 50/30/20 rule is a budgeting guideline. According to financial expert Rachel Cruze, the first appearance of the 50/30/20 rule was in 2005 in a book called “All Your Worth.”
You allocate a percentage of your monthly income into three primary categories. Here’s how it breaks down:
- 50% for essential expenses. These are needs that include shelter, utilities and food. Transportation, health insurance, daycare and making the minimum payment on all your debts are also included.
- 30% for wants. These are the non-essential purchases that make life a bit more comfortable. A few wants include eating out, new clothes and other items that help you improve your standard of living.
- 20% for savings. The money you put toward savings should be designed with today, tomorrow and the future in mind. You should be paying off any debt you have, putting money aside in an emergency fund and saving for retirement.
The 50/30/20 Rule Is Flexible
The 50/30/20 rule, at first glance, does appear to set hard guidelines in place for the percentage you should spend on needs, wants and savings.
However, these percentages are not a set rule. The formula acts as a guideline. It is a basic financial strategy and one where you may adjust it as you see fit to meet your current financial needs. For example, someone who does not have a car may adjust the 50% needed for essential expenses to put more money into savings. This could turn into a 40/30/30 rule based on specific needs.
Or, someone who is working to cut back on the amount of eating out and coffee runs they make could readjust 30% to 20% for wants. The person then would reallocate the extra 10% into savings or needs. Maybe this turns into the 60/20/20 rule or 50/20/30 rule.
Whatever your financial situation looks like, this budgeting guideline offers enough flexibility for individuals and families to tweak the guideline to meet their needs without sacrificing wants or savings.
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