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Efficient budgeting is the key to effortless money management.
However, regardless of age, most Canadians suffer from creating a budget plan that actually works in favor of their finances!
It doesn’t have to be this hard.
It should be simple enough to follow and easy enough to create! Still don’t get it? How about we introduce you to one? The 50/30/20 budgeting rule!
Ever heard of it? Yes? No? Well, now you’re about to know all the details you can’t afford to overlook!
Because good savings and a controlled healthy budget are all, we preach. ;)
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The 50-20-30 or 50/30/20 rule is unlike your everyday budget control, where you monitor the tracking and spending on a complicated app.
Hah, only to ditch it by the third day because, well, umm, it’s a lot to handle?
Whether you use a budgeting spreadsheet or a money calculator, looking at your finances to analyze where they’re going can be scary,
Not Anymore!
Introducing the 50/30/20 budgeting rule. So, what is it?
Elizabeth Warren, a US Senator, introduced the world to the now popular budgeting rule in her book.
She defines the rule as an idea to keep things in check by using three categories:
She explained how a simple budgeting rule can help you understand your finances, make better goals, and actually achieve them in her book, “All Your Worth: The Ultimate Lifetime Money Plan.”
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Elizabeth advises people to divide their after-tax incomes into three categories (mentioned above) to better manage their holiday and everyday finances.
Let's take a closer look at each of the categories:
This is the broadest category of the division and covers everything you'll need to stay alive (Literally! :p).
Simply expressed, needs are unavoidable expenses and payments for all necessities without which life would be impossible.
Therefore, 50% of your after-tax income should handle your essential expenses.
It may include:
And so much more as long as it covers the quota of the ‘needs’ and ‘essentials’ category.
However, if you find the needs exceed the 50% budget by the end of the day, you might want to reanalyze and re-select things you consider “essential.”
Or might take some manageable steps:
The goal isn’t to starve or feel frustrated but only to restructure your finances for a better purpose.
The 30% budget is set to use on all your “wants,” which are the non-essential things you need to continue living happily.
Now the key phrase here is ‘non-essential things you need to live’ and the essential things you must have to survive.
The main difference between needs and wants!
Everyone can have a different definition of their wants, and nobody’s wrong. Honestly, it’s your money, and you have the right to use it however you want.
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Want to save more? Follow these 7 financial goals! |
Your “wants” might include:
The aspiration to want things is simply unlimited. So, how can you manage to keep the “wants budget?
And how can you decide what to buy and what not when all the things are literally your desires and cravings. Here are some tips:
You have to control your impulse buying to keep the wants budget under the 30% category!
Here watch a video on Impulse buying before we move further:
Now, the last category of the budget rule only has a whopping 20% for so many things.
It covers everything that you can’t classify as needs or wants.
However, it doesn’t mean it’s not important. In fact, it controls what you put towards your savings account or debt clearing statements!
In general, it may include expenses revolving around:
Yes, you can cover all three in the same category with a 20% budget.
As we explained earlier in the guide, the 50/30/20 budgeting rule is simply an idea to keep your money management in check; it’s only fair to divide the categories this way!
Now the sections must be covered in an orderly manner!
You should only pay down the 20% into your debt payments, savings, retirement plan, etc., after you have managed to clear the needs and wants bills!
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To manage all the expense categories like a pro is the simplest answer to this question!
There is plenty of reasons why you should budget. Here are some of them that might catch your interest:
Or practice good financial habits to avoid the no-money-panic you feel in the last week of every month.
So how the 50/30/20 budgeting rule is effective and important for your finances?
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Now that you know everything about the rule, it’s time to learn how you can apply it to your life to get the best out of it.
Here are the key steps to start:
It is the amount of money that is deposited into your account every month (after the tax deductions).
To start following the budgeting rule, you must know the exact after-tax income figure!
Bonus: If you want to calculate your after-tax income, check this helpful guide by the corporate finance institute.
Now that you have an estimate of what you have, it’s time to divide the money into categories.
Of course, you can’t be perfect in setting the money or percentage for this, but the key is to be somewhat responsible.
You can consider these categories as buckets to add the essential, non-essential, and additional expenses.
You can have a monthly review meeting to evaluate your progress and whether you have analyzed your expenses correctly.
You can always adjust the money and tasks as there’s always room for improvement!
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To answer simply: YES!
It’s an ideal budgeting method for Canadians who struggle to stay motivated and on the financial track.
As all your expenses are listed and divided, it becomes easy to see and understand how much you need to spend on something!
Most importantly, it can help you continue following the path to meet your
savings or retirement goals. What’s good than that? Absolutely nothing! :p
So, how can you decide if the 50/30/20 budgeting rule Is right for you? Let us help you!
The 50/30/20 budgeting guideline is a simple approach to get started on your path to financial stability.
Revisit your budgeting categories on a regular basis when your financial situation changes to ensure that it continues to work for you at every point of your trip.
Life is not a bed of roses, but it also doesn’t have to be a bed of thorns! You can find a mid way to settle peace and prosperity to survive and really live!