The 50/20/30 Rule of Budgeting
Budgeting your expenses seems tedious or even unnecessary to some, but is a vital practice to those who wish to save enough not only for retirement but for other big-ticket items. Vacations, new cars, maybe even a cottage on the ocean can all be attainable with a proper budget.
An easy-to-remember formula for your monthly budget is the 50/20/30 rule:
50% of your income should be allocated to the necessities like rent or mortgage payments, utilities, loan payments, and in many cases food, clothing, and transportation.
Financial Goals, 20%
20% of your income should be allocated to financial goals like retirement, vacations, your rainy-day fund, and general savings.
The final 30% of your income can then be allocated to your “Lifestyle”. This includes entertainment, concerts and movies, hobbies, and the food or clothing you might not necessarily need, like takeout and that Gucci bag you’ve been eyeing online.
While this formula might not be feasible for everyone, it reminds us of the principles of good money management: pay your bills on time, pay yourself, and spend wisely on luxury items. If you have a sudden drop in your income, then necessities will most certainly take more than 50% of your income. If you get a raise without increasing your necessities, then you have more funds to play with allocating towards that vacation or your retirement plan. The key is to identify your short and long-term financial goals and plan accordingly.
If you are working toward one or more financial goals, from finally owning your own home to retiring early, speak with one of our advisors to gain some insights into a budgeting formula that could work for you.