Monday, January 5, 2015

Monthly Budgeting: The 50,30,20 rule

It is 2015 and I am already reflecting on the past year and all of my holiday spending. I started looking into my spending habits given that I have a lot to purchase and plan for this year. It is stressful to measure my spending compared to other people given that everyone's life and income is different. So as a result, finding an answer to this can get complicated

I can't find the source for it, but I remember reading about how Winston Churchill would ask his generals for the full facts happening about WWII just so he can sleep at night. It is an example of how taking control and facing the reality of the issue can free the brain to focus on other tasks and be more productive.

A great rule that I found is the 50 30 20 rule. Simply, it is works as setting three buckets and splitting your income between them

50%: Needs
This money is set for everything that you can not live without. This includes Rent/Mortgage, Transportation, and bills. These are fixed costs that you are paying monthly.

20%: Long term
This is for either clearing debt or saving for retirement (401k or IRA). Savings for long term purchases (e.g. a house) can go here.

30% Lifestyle
This is for flexible spending items. This includes entertainment, restaurants, and all fun activities that you do on regular basis.

You don't have to follow the same percentages of course , but you need to be careful to not overstep a bucket as it can harm you in the long run.

The best thing about this budget is that it can
a) free you from the guilt of having fun. You will have no problems blowing your money on fun activities as long as you know that you are within the threshold that you set for yourself.
b) Better comparison to how others spend their money if that is your thing.
c)Finally, the ability to actually observe and save. If you notice that you are overspending on a media subscription that you are not using then you should think about canceling it.

Not sure why started with a WWII reference.. but I think we should all attack our problems as that is the only way to solve them.

Hope that helps.

(Not so bad) Resource: