Good money management habits start with a budget. The word budget can often provoke the feeling of restriction, but it’s exactly the opposite. You’ll have more financial freedom if you’re able to curb overspending and increase saving. Taking the time to outline and stick to a budget is an essential step towards financial success.
Many people unknowingly spend too much and save too little. The 50-30-20 rule of thumb helps you allocate your monthly income, limits overspending, and helps get saving back on track. Here’s how the buckets breakdown:
50% to Needs
Needs are what you can’t live without, like:
- Utilities (electricity, water, etc.)
30% to Wants
Wants are your desires, but you don’t actually need to survive. Wants could include:
- Eating out
20% to Financial Goals
This covers two main categories:
- Savings, including retirement contributions and goal-specific savings like a down payment on a home or education.
- Debt payments.
Keep in mind that this is a rule of thumb, and don’t take it literally—it’s just a framework to get you started. You are free to adjust each of the areas to fit your personal situation or financial goals. For example, if you’re looking to pay off a large amount of debt, increase the percentage of your monthly income to help you meet your goals.
To make the most of this budgeting method, consider the following:
- Spending Habits. Do you have spending vices that lead to overspending? Review your bank and Credit Card statements and see if you can uncover any common spending trends. Identifying your current habits will help you learn how to use a 50-30-20 budget that effectively cuts spending where you need it most.
- Irregular Large Expenses. There are always situations where some expenses, like car repairs, can’t be avoided. These items should be categorized as “wants” and should factor into your budget.
- Add Up Income. Depending on your job, you could have a steady paycheck, or your income could fluctuate throughout the year. If the latter is the case, find your average income for the last six months and use that as your monthly income.
The 50-30-20 method tends to be a great option for those just beginning. It’s a simple yet effective budgeting option that will help you learn more about budgeting and your relationship with finances. Check out our Game of Debt-Free Life as a fun way to visually track your payments.
For another convenient way of monitoring your money, check out our Money Track tool, available through Online Banking. The Money Track tool allows you to link all of your external accounts to one location so you can track your spending habits, create and achieve goals, budget across multiple accounts, and more! Click here to learn more.
As Yolo County’s only locally sourced credit union, we’re here to help you grow your future close to home. If you’d like to learn more about budgeting, check out our Budgeting for Life Achieve playlist, or check out our other budgeting blog, Budgeting: Zero-Based.