The greatest resources we have are our time and money. It could be because that they each depend on and contribute to each other. Ever heard the saying that time is money? Or he who has time has no money? If we are not careful, we could end up with none. To avoid such extremes, it is only necessary that we plan and utilize these two important resources and do it in the most practical and realistic way.
When it comes to budgeting, many of us think we get it; until we realize that we don’t. We often find ourselves short of money when we need it. Creating a budget and sticking to it requires self-discipline and objectivity. This means that you can be truly honest with yourself, make decisions, and follow through with them.
How then do we go about it? This is where the rules of budgeting come in. With all the numerous resources available, budget rules like the 50-30-20 rule help to simplify the process and put our spending into perspective.
This simple budget rule was created by Elizabeth Warren. It divides your after-tax income into three main categories; needs, wants, and savings/investment. It is simple and straight-forward, making it easy to apply in day-to-day life. The three types of needs want and savings and investments also have different meanings for different people. This makes it flexible and allows us to think about our expenditures and allocate them accordingly. Its simplicity and flexibility are also what make it a popular budgeting guide.
50% goes to your needs, which are those things that are necessary for your survival like rent, food, utilities, and healthcare. If you are spending more than 50% on these, then you have to re-examine your situation and downscale. This could mean moving to a cheaper house or cooking at home other than eating out. Our needs also change at different stages in our lives. This makes it easy to carry on the same concept in different life situations.
30% goes to wants. These are things that are things that we like but are optional. They are not luxuries but normal things like buying that extra pair of shoes or the regular weekend visit to the nice restaurant around the corner. Objectivity takes the lead here, and we have to decide if that premium Netflix subscription is necessary or we can do with a cheaper alternative.
The remaining 20% of income goes to savings and investments. This can also include paying off debts if we have any. Here, we need to set very specific goals, whether it’s a retirement plan or saving for something specific or having an emergency fund. For those with car loans or mortgages, the minimum monthly payment would be a need and part of the 50%, so any extra costs would go into reducing that debt and be part of this 20% category.
There are other budgeting rules like the 60-20-20 budget rule, which is based on the same principles of identifying and allocating income to needs, wants, and savings or investments. These denominations aren’t cast in stone, and we can change them to suit our specific financial goals. The most important thing is that we can track our spending and identify areas that need change. Don’t forget self-discipline and objectivity because, in the end, our income is fixed, and our budget doesn’t care if we spent an extra $30 on shoes or set it aside for our emergency fund.