How to Manage Your Money With the 50/20/30 Rule
How to Manage Your Money – The 50/20/30 Rule
There is a budgeting concept that we came across recently. It’s called the 50/20/30 Guideline and shows you how to manage your money.
A firm, Learnvest Planners, say they use this plan for their new clients and shows them how their money is being spent. They say that it can be effective for a new college graduate in their first job or even a young family with children.
Most budgeting programs have different categories where you allocate a certain sum of money. The 50/20/30 rule breaks it down to three basic categories where a certain amount of money is allocated each month. The plan also allows you to decide the order of the money being allocated.
Here is the breakdown of the 50/20/30 rule:
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- Fixed Costs
This is a familiar category to all budgeting systems and includes monthly expenses that are the same each month. They include items like rent, home mortgage payment, auto loans, and don’t forget those student loans. Learning how to manage your money with student loans can be exasperating.
Learnvest also includes expenses such as utilities, club memberships, and even your Netflix bill. Practically any type of expense that you commit to pay each month is also included.
The folks at Learnvest suggest that your goal for allocating money to this category be limited so as not to exceed 50% of your normal take home pay.
- Set Financial Goals
In this second category they suggest at a minimum, 20% of your normal take home pay, for those important payments that will help you to reach your financial foundation goals. The plan stipulates three important goals that everyone should try to reach.
They are: building an emergency fund for the future, saving for retirement, and paying down your credit card debt. The goals can also include saving money for a down payment on a home, or some other large savings priority.
- Flexible Spending Category
The last area in the 50/20/30 plan is to allocate 30% maximum of your normal take home pay to any flexible spending expense. Some of the expense items in this area are groceries, hobbies, entertainment, gas for your auto, and dining out.
The reason that groceries are included in this area is because the amount spent on food varies, even though it certainly is a necessity.
The promoters of this budget say that it doesn’t matter how much you spend on any particular expense in this category. Their only requirement here is that you are aware of your spending and don’t exceed your total flex budget each month.
Some individuals, like myself, may find it difficult to work with this type of budget. We’re used to budgeting for every type of category expense, similar to the envelope budgeting system. When it’s spent for the month, that’s it.
However, as I’ve said in many of my articles, there is “no one size fits all” budget. Whatever works for you and controls spending is the one that you should use.
I personally like to use the one that the folks at You Need A Budget promote. They show how to manage your money by budgeting the current month expenses based on the previous month’s income. YNAB also emphasizes that every dollar should be put to work. They also emphasize debt reduction and elimination which is very important to me.