Understanding the 50/30/20 Budget Rule

Budgeting is an important part of maintaining a healthy personal finance. Through budgeting, you can keep your expenses under better control and stay true to your financial goals. Budgeting also helps you deal with financial difficulties, making it a handy tool to utilize when you are dealing with mounting debts and expenses.

One of the most popular budgeting rules is known as the 50/30/20 budget rule. This is a rule that can be applied in different situations. The goal of this rule is helping you achieve better financial control while securing a brighter financial future. Before we get to how you can achieve those goals, let’s take a closer look at the rule itself.

What do 50/30/20 mean?

The numbers 50/30/20 represent portions of your income. There are actually several variations of this budgeting rule, but we are going to stick with the more general view of personal budgeting for this article.

You start by allocating 20% of your income towards savings and investments. This is something you do immediately so that you always have a portion of your income saved or invested. It is a great way to build a better financial future.

30% of your income can be used for repaying debts or housing costs. This is where the variations of this budgeting rule stems from. While there are those who allocate the 30% towards all debts, some financial experts allocate this portion strictly for housing expenses, including paying your rent.

The remaining 50% can be spent on everything else. This includes monthly bills and everyday expenses. You are basically limiting your expenses to no more than half of your income. If you allocate the previous 30% only on housing, the 50% portion must also cover debt repayments.

The Savings

The 20% portion that goes towards savings and investments must be allocated as soon as you receive your pay check. The one thing you want to avoid is waiting until the end of the month before saving whatever money you have left.

By sticking with the budget, you are accumulating wealth. It may not be possible to invest this portion immediately, but you will have more investment instruments to use once you have enough in your savings account.

You can save smaller portion of your income if you are recovering from bad debts – we will get to this in a bit – or increase this portion to build your own emergency fund. The rule is flexible enough to account for specific needs too.

The Repayments

As mentioned before, we are going with the more general budgeting rule for this article. This means you can allocate 30% of your income for repaying your debts, including your mortgage or any loans you have via lenders like Omacl. Ideally, you want to keep your debt-to-income ratio well below 30% for a healthier cash flow.

If you are dealing with a series of bad debts, getting your debt-to-income ratio to the ideal level should be your priority. This may mean cutting your expenses and reducing the amount you save for the purpose of settling bad debts as quickly as possible.

You also want to consider your options if you are dealing with high debt-to-income ratio. For example, you can consolidate a number of expensive credit card debts into one loan that is cheaper and easier to manage. By saving on the cost of the loan, you will have a lower monthly repayment to deal with.

Once you have fewer debts to repay, allocate the extra money towards savings and investments. You will have more options when it comes to investing your money, allowing you to generate more income and continue to improve your financial future in a gradual way.

The Expenses

Last but certainly not least, you have the portion allocated for expenses. This too is flexible and can be adjusted to your specific situation. Similar to debt-to-income ratio, you want to keep your expenses-to-income ratio at 50% or lower.

Start documenting your expenses to see if you are spending more money than you can afford to spend. If that is the case, start eliminating non-essential expenses to get the ratio to its ideal level. In a more severe situation – such as when you have bad debts to repay – you can go a step further and stick with the bare minimum until your debts are more manageable.

Once your expenses are under control, you can further improve by allocating more of your income towards investments. Once again, you are boosting your income level by investing more, which means you can stick with a healthy budget easily.

Getting Started with Budgeting

Budgeting isn’t a difficult thing to do. The more you know about your personal financial state, the better you will be at allocating portions of your income for specific – the right – purposes. Now that there are apps and services that can help you manage your personal finance better, getting started with using the 50/30/20 budget rule is a walk in the park.

How to Get Your Personal Finance Back on Track in 3 Steps

If you are having difficulties keeping up with your bills and monthly repayments, you are not alone. Despite the growing economy, thousands of people are dealing with personal financial difficulties in different forms. The problems usually stem from the same source: mismanagement of income and expenses as well as the overall personal financial state.

Getting back on track and regaining control over your personal finance may seem like daunting tasks to complete when you are underwater, but there are actually a lot you can do right now. You just have to know how to get started with getting your personal finance back on track, and that is what we are going to discuss in this article.

1. Assess the Situation

The first thing you want to do is taking a closer look at your present financial state. In order to solve the problem, you have to admit that you have a problem, and you need to understand the situation fully. This is a challenge of its own, especially if you are reluctant to know the financial state you are in.

The best way to start is with your loans and regular bills. They tend to have fixed payments every month as well as known due dates. List everything and continue with taking a closer look at your income. At this point, you should be able to see the portion of your income you actually spend on regular expenses and loan repayments.

Next, it is time to document your expenses. You can either go through the month and write down everything or try to work backwards and review expenses from the previous month. The former is usually the easier way of the two. Make sure you document every single expense no matter how small it may be.

2. Crunch the Numbers

Now that you have a clearer picture of what you are up against, it is time to work on a plan to improve your personal financial state. With a complete list of bills and loans to pay, expenses to deal with, and the income you actually have available, it is time to work on understanding your ratios.

The first one to calculate is debt-to-income ratio. This is the total amount of your debts divided by your total income; if you receive your pay check every two weeks, use your monthly total income as the benchmark for this process.

Next, figure out your total expense-to-income ratio. Similar to the previous ratio, you want to divide the total amount of expenses, including your energy and other regular bills (aside from loan repayments), by your total income. To complete the set, calculate your surplus/deficit amount: total income – (debts + expenses).

With the numbers in hand, it is time to compare them with the ideal ratios that you need to achieve. Your debt-to-income ratio needs to be no higher than 30%. Anything beyond this number means you are putting your personal finance at stake. You face greater risks of running into problems making monthly payments against your loans.

Your expense-to-income ratio, on the other hand, needs to be well below 50%. If you are spending more than 50% of your income on everyday expenses, you know that there are a lot of unnecessary expenses that can be reduced.

It is also worth noting that you want a surplus of around 20%. This is the money you allocate towards savings and investments. A deficit is a big no; it is a sign that you have some big changes to make. That brings us to our third step, which is….

3. Time for Some Changes

There are three practical things you can do to start regaining control over your personal finance. First, you want to get your loans in order. If the repayments are greater than 30% of your income, you need to work towards reorganizing your loans immediately. You can focus on repaying the smaller or the costliest ones, and then work your way towards getting the other loans settled as well.

You can also choose to consolidate your loans, especially when the existing ones cost too much. Rather than spending more money on late fees and high interest, it is much more economical to consolidate the high-cost loans into one, very manageable debt.

Expenses are your easiest hurdle but getting your expenses in order does take a bit of discipline. Take another look at your list of expenses and be prepared to cut expenses that are not absolutely necessary. Go back to the bare minimum so you can allocate more money towards repaying your loans.

While you are at it, find new sources of income. Thanks to the internet, you can now apply for remote jobs or open your own ecommerce store. The more you work towards getting the numbers to their ideal levels, the more control your will have over your personal finance. The rest will be easy from this point.