by Susan Paige
Almost 80% of Americans admit to living paycheck to paycheck.
It’s hard to get ahead in life when you’re treading water when it comes to your finances. Instead of crossing your fingers and hoping you have enough to cover your expenses each month, it’s time to do something to change your situation. Gaining control of your finances starts with creating a solid budget.
Keep reading to learn about the 50/30/20 rule in personal finance and how can it help you simplify your budgeting categories.
50 Percent for Needs
When it comes to budget percentages, the biggest category should go towards your needs each month. For this article, let’s consider you earn a monthly income of $4,000. Following this budget, you’ll spend $2,000 each month on your household needs.
Items in this category include:
- Rent or mortgage payment
- Gas and vehicle costs
Keep in mind that this category is only for your absolute needs. So your restaurant money each month shouldn’t be included in your grocery budget.
30 Percent for Wants
The next category to help you manage money efficiently is for your wants. It would be unrealistic for anyone to hold themselves to a budget that allowed for no unnecessary purchases. This would only result in a person breaking the budget, becoming discouraged, and giving up.
For our example income of $4,000 a month, you would have $1,200 for your wants. This includes:
- Eating out money
- Cable or phone bill
- Monthly subscriptions
Not sure if an item counts as a need or a want? Ask yourself if you could live without the item. There are probably a lot more items in your budget that count as wants than there are needs.
20 Percent for Savings
The last category is how much of your paycheck you should save. For an income of $4,000 monthly, try saving $800 a month.
When it comes to saving money, the number one priority should be an emergency fund of at least three months of expenses. From there, you can contribute to your retirement, college fund for your children, and a general savings account.
Ways To Tighten Your Budget
Know that you know what your percentages your budget categories should be, it’s time to tighten the areas that over budget.
One easy way to do this is to gain control of your debt payments. For example, a debt consolidation loan could lower your monthly payments and your overall interest rate. If this sounds helpful, you may want to learn more details about this process.
Debt consolidation means less money out of your needs budget and more money for wants or savings. You may also consider a debt settlement which is paying a lump sum to your lenders in an amount less than your total owed.
Establishing Your Budgeting Categories Is the First Step
Using the budgeting categories for the 50/30/20, you’ll have a better idea of where your money is going each month. Once you’re aware of your budget-busting categories, you can take the proper steps to lower or eliminate those costs.
Pretty soon, you’ll find you have money left over in your bank account the night before payday hits. But don’t be discouraged if you find it hard to stick to your budget at first. Often times, it takes a few months to get used to a new budget system, but soon it’ll seem second-nature.
If you’re looking for more tips to improve your financial future, browse the rest of this site.