The 50/30/20 rule, a budgeting principle popularized by bankruptcy expert and US senator Elizabeth Warren, is perfect for people who don’t like tracking their expenses or who are new to budgeting. The whole idea behind it is to divide your income so that 50% takes care of your needs, 30% takes care of your want, and 20% goes to savings and debt repayment.
Most people think you can only use this concept if you have a steady or salaried income. However, you can use it with irregular income as well. This rule is ideal for those of you trying to get of debt or who want to learn how to save for the long term.
So how do you create this budget?
Calculate the income you roughly make each month
Work out what you averagely bring home every month from all your sources of income. You can also work out either a projected or minimum income that you can use. How To Create A Budget And Different Budgeting Methods You Can Use
Identify your ‘needs’
These are the things you need to ensure you’ve got a quality of life that’s acceptable to you. Some of these things include mortgage/rent, water and electricity bills, basic food, personal and clothing items, Wi-Fi, and so on. Of course, people’s acceptable quality of life varies greatly. Just start with all the absolute basics and take things from there.
Once you have identified what you need to live comfortably, don’t spend more than 50% of the income you bring home every month. If this is the first time you’re using this rule, you’ll want to have estimates of your monthly upcoming expenses.
List your ‘wants’
Spending nearly a third of what you bring home on your luxuries and wants sounds pretty sweet, no? However, don’t go buy that designer bag just yet. This segment is meant to take care of all the purchases that aren’t completely the basic essentials. Cost can add up fast when you look at it this way.
Some common examples of wants include; video games, movies, eating out, fancy food at home, booze, tech upgrades, perfumes, and so on. These wants shouldn’t consume more than 30% of the bacon you bring home.
Make savings and repayments
The 20% that remains from your income should be directed to things like emergency rainy-day funds, saving for home deposits, pension contributions, and paying off your loans like student loans, credit cards, and other miscellaneous debt.
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Remember, this segment should only cater for debt repayments that are more than the minimum amount required. Say for instance you owe Ksh 100,000 and your lender requires you to make monthly payments of Ksh 10,000. Only pay that Ksh 10,000.
This budget may not be for everyone. Some people would rather the 80/20 rule, whereby their wants and needs are lumped into one segment. People that don’t struggle too much with covering their basic expenses might prefer this strategy. However, it’s not ideal for those looking to make debt repayments and save more reliably.
With that said, budgeting is all about finding ways to live as comfortably as possible while still being able to save and buy the things you want without having to worry about running out of money. How you manage this will always be all up to the principle that best suits you and your lifestyle.
This article gives you a great basic to work out what you need in terms of budgeting. Finances 101: How To Create A Budget And Different Budgeting Methods You Can Use
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