Is your idea of “disposable income” basically any money that is left over each month after paying your rent or mortgage payment and utilities? Believe it or not, this is most people’s idea of monthly budgeting.
It is a difficult task to write down your income and expenses to get an idea of exactly how much money you have left over at the end of every month, however, it is a necessary mission if you ever want to budget your money wisely.
Pioneer of the 50/30/20 rule
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Who would think that one of the easiest methods of budgeting was first brought to the forefront by one of the Democratic 2020 Presidential candidates? Before Senator Elizabeth Warren became a thorn in President Donald Trump’s side and a no-nonsense critic of technology monopolies and shady Wall Street tactics, she was a Harvard law professor and bankruptcy expert who co-authored the book: “All Your Worth: The Ultimate Lifetime Money Plan” in 2005.
One of the major budgeting ideas that remains highly relevant today emerged from this book. This best rule to budget money monthly was coined by Senator Warren as the 50/30/20 rule.
Breakdown of the best rule to budget money monthly
This simple rule to save money gives you the percentages that you should divide your after-tax income by in order to budget. 50% is to go towards your needs while 30% should go to your wants. Finally, 20% is to be allocated towards savings.
This monthly expenses percentage of income method of budgeting is great for those who still want to maintain a nice quality of life. It does not give you a ridiculously restrictive budget like someone from an episode of “Extreme Cheapskates”. One episode featured a woman who used old rags in her bathroom instead of toilet paper!
Budget category examples
While everyone has an understanding of what savings is, the line for this budgeting rule may blur with the needs and wants categories, therefore, I will detail a few examples:
- 50% Needs – Needs are the things that you must absolutely pay. Think of these things as essentials. These include rent or mortgage payments, health insurance, transportation, groceries and utilities. This does not include monthly payments for things that you can do without such as gym memberships, cable television and subscription services.
- 30% Wants – Okay, so now this is where you can allocate gym membership fees as mentioned above. Wants are non-necessities or things that you may not necessarily need but they bring you joy and entertainment. Examples of wants are vacations, tickets to concerts, an expensive cell phone upgrade or a luxury name brand purse.
- 20% Savings – The easiest place for most budgeting novices to put away money is in your regular savings account. Unfortunately the average interest rate on regular savings accounts stands at 0.09% APY. If you want to get a better return on your savings then you would have to look at other options such as high yield savings accounts (which have no risks but maintain higher minimum balance standards). To get higher returns you would have to look towards investment vehicles such as stocks, bonds and mutual funds which do carry some risks. These risks can however be mitigated by speaking with an investment professional or conducting extensive research.
Now that you have been introduced to the tried and tested 50/30/20 method of budgeting you can be well on your way to meeting your financial goals!