The 50-30-20 rule of budgeting is used to describe the percentage of our income that should be allocated to our Needs, Wants and Investments or Savings in order to help the individual to achieve a more balanced financial life.
Many experts are of the opiny that for one to attain financial freedom, they have to master the 50-30-20 rule for budgeting because it is very essential in helping individuals allocate their income strategically to meet their needs.
Now let's look at how these percentages are allocated.
50% of your income is the first percentage in the category. This category covers all the essential expenses (needs) like food, clothing, shelter, transportation, electricity etc. It encompasses all the fundamental necessities of life. This is to say that the 50% rule in budgeting describes allocating 50% of your income on the basic necessities of life for human survival.
30% of your income unlike in the 50%, this is meant to cover your wants. Your wants are the things you desire to have or do that are not really a necessity for survival. This can be entertainment z vacation and any form of non-essential purchases you make etc. This room makes room for you to enjoy your life because you've worked hard for it.
The third rule is the 20% of your income which is allocated to Investments, savings etc. 20% of your income is what usually saves you on ready days because it is usually for savings or investments or debt repayment. It also helps you prepare for retirement.
Practical Tips for Implementing the 50-30-20 Rule
You need to have a detailed record of your expenses. Measure your spending habits and identify what, where and how you spend money. This will enable you to make the necessary adjustment while trying to allocate the percentages.
You should also review your financial goal and financial situation regularly because this will help you to determine whether or not you need to make changes in your financial plan.
Factors That Can Influence Your Application of The 50-30-20 Rule of Budgeting
There are several factors that can influence your allocation of percentages while planning your budget and some of these factors include:
Your level of income. People with low level income might find it hard allocating 20% of their income to investment or savings because most of their income will go to their needs.
Bad debt.
Geographic location.
Family size.
Your financial goal.
In summary, the 50-30-20 rule in budgeting is a very powerful tool that serves as a compass for individuals on their journey to achieving their financial goal. Ensure that you tailor this rule to your personal financial life by allocating the percentages in a way that balances with your level of income.
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