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How to Set Up a 50/20/30 Budget

Debt payments

Debt payments may look confusing when you add it to the savings column. But the easiest way to build up a savings balance is not to have your money go toward debt. Once your debt is paid off, you can increase the savings.

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IDEA EXTRACTED FROM:

How to Set Up a 50/20/30 Budget

How to Set Up a 50/20/30 Budget

https://twocents.lifehacker.com/how-to-set-up-a-50-20-30-budget-1843889336

twocents.lifehacker.com

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Key Ideas

The 50/20/30 budgeting method

With the 50/20/30 budgeting method:

  • 50% of your monthly spending goes toward essentials - your home, your food, etc.
  • 20% of your monthly spending goes toward savings goals. It also includes paying down debts as it helps you build savings later.
  • 30% of your monthly spending goes toward everything else. That might include travel, gifts, and dining.

Debt payments

Debt payments may look confusing when you add it to the savings column. But the easiest way to build up a savings balance is not to have your money go toward debt. Once your debt is paid off, you can increase the savings.

Reducing your essentials

Play around with your monthly budget to see where you can reduce your monthly spending:

  • You could contact your internet company to get a discount.
  • You can clip coupons and use rebate apps to spend less on your monthly groceries.
  • You could set aside less for medical expenses if you have an emergency fund.

SIMILAR ARTICLES & IDEAS:

A Monthly Budget For Your Money

No matter how little or how much money you earn, creating a monthly budget is one of the most important aspects of managing your finances. What gets measured gets managed.

...

The Envelope System

The Envelope system is a way to track your variable expenses like food, entertainment, and drinks.

This method, preferably used weekly, allocates a certain amount in each category in labeled envelopes (food, drinks, movies, etc.). Once the envelope is empty, you are done spending in that category.

How to Create a Good Budget

The principles that make a good budget, something you can stick to:

  • Being Realistic: Being too strict is a recipe for failure.
  • Making Adjustments: A budget is not set in stone, but a fluid thing.
  • A Team Sport: If you live with a partner or spouse, you have to agree mutually on how to budget the financials.
  • Expect the Unexpected: Keep an emergency fund, ideally 3-6 months of necessary expenses.
  • Budgeting the Expected: Certain upcoming expenses need to be budgeted in advance, like property tax, holiday shopping, etc.

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Budgeting = creating a plan to spend your money

Budgeting is simply balancing your expenses with your income.

It's a plan for the coordination of resources and expenditures. When you budget your money, there’s a desir...

How to create a budget
  1. Gather Some Financial Information: gather a detailed list of your income and expenses.
  2. Select a Budgeting Method: figure out how you’ll budget your money to meet your most pressing financial goals.
  3. Create Your Budget: tally up all your expenses and income to see where you stand and allocate expenses.
  4. Execute Your Plan: you can use a notebook, pen and paper, a spreadsheet or an online software.
  5. Reward Yourself: you can work a small percentage into your budget to treat yourself each month.
The 70:20:10 budgeting method

This method suggests that you allocate 70 percent of your income to expenses, 20 percent to savings, and the remaining 10 percent to debt.

70:20:10 may work for someone with a healthy emergency fund and minimal debt.

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The Golden Rules of Personal Finance
  • Spend less money than you earn
  • Always plan for the future: you should always look forward beyond the current month
  • Make your mon...
Regular monthly bills
Regular monthly bills

The bulk of your budget is made up of necessities like rent, phone and internet bills, insurance, etc. If you can lower your monthly expenses, you can save a lot for unplanned events.

Debt when you're on a tight budget

There are a couple of paths you can take to pay off your high-interest debt when you're on a tight budget.

  • The snowball method. For those who need to see progress, pay off the lowest balance first. You'll feel inspired to keep going.
  • The avalanche method. Choose the debt with the highest interest rate to pay off first. This may require larger monthly payments and will take longer to see progress, but you will save the most money in the long run.
  • If you need to prioritize your credit score, focus on paying down your credit cards first. Paying the ones you are near to maxing out will improve your score quickly by a few points.
  • Set up payment plans, even if you can only afford a few dollars at a time. That way, your lenders can see you're paying something.
Incorporate unplanned entertainment in your budget

Financial professionals will advise you to cut out expensive nights out. In truth, you will have night's out, even when you're dirt poor.

To incorporate unplanned entertainment, set aside an amount each month. Be realistic. You can open another savings account for fun spending or you can use cash only.

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The 50-20-30 rule

It is a budget rule to help people reach their financial goals. It states that:

  • You should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-...
Needs, wants and savings
  • Needs: these are those bills that you absolutely must pay and are the things necessary for survival (rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities).
  • Wants: these include all the things you spend money on that are not absolutely essential (dinner and movies out, vacations, electronic gadgets, etc.)
  • Savings: this includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market.
The zero-sum budget

Using this method forces you to “spend” every dollar that you make, by allocating all of your earnings into the different categories that your finances require.

It prevents waste and m...

Steps of the zero-sum budget
  1. Determine how much you make on any given month.
  2. List your bills: Once you determine how much money you'll make this month,  figure out how much money you need to spend next month.
  3. Compare and contrast:  Once you see your monthly income and your monthly bills on paper, a clear picture of how much money is left over emerges.
  4. Spend all of your money on paper: decide where that money will serve you best.
  5. Track your spending.
  6.  Make adjustments to get it right.
Making Your Budget Too Strict

Budget for the life you have. When you’re going through your budget and assigning spending categories, be realistic. 

Don’t tell yourself you’ll never buy a single discretionary i...

Budgeting for a Life You Can’t Afford

This becomes a problem when you’re spending for a life you can’t afford. It puts pressure on your budget and encourages you to live in a paycheck to paycheck cycle.

Assess your financial situation, cut back on your expenses, prioritize your money goals, and then come up with a new spending plan.

Budgeting Without a Purpose

It’s hard to stick to a budget that doesn’t have a goal.

When there isn’t one, your budget becomes an afterthought rather than a spending plan to reach your financial goals.

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What a Budget Does

As a personal financial planning tool, a written, monthly budget allows you to plan for how you'll spend and/or save your money each month and also keep track of your spending patterns.

Make a Budget in 6 Simple Steps
  1. Gather every financial statement you can (bank statements, investment accounts, recent utility bills).
  2. Record all of your sources of income.
  3. Create a list of monthly expenses.
  4. Break expenses into 2 categories: fixed and variable.
  5. Total your monthly income and monthly expenses.
  6. Make adjustments to expenses: If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal.
How much you should save every month
How much you should save every month

The popular 50/30/20 rule states that you should reserve 50 percent of your budget for essentials like rent and food, 30 percent for discretionary spending, and 20 percent for savings.

But ...

Why 20 percent is recommended

Assuming you're in your 20s or 30s and can earn an average investment return of five percent a year, you'll need to save about 20 percent of your income so you can reach financial independence when you're older.

Financial independence means that you can maintain your chosen lifestyle entirely from the interest of your investments and dividends.

The four percent rule

The four percent rule states that you could withdraw four percent of your principal balance every year and live on this indefinitely. That means you need to save 25 times your annual expenses to become financially independent.

The four percent rule is not perfect. There is no risk-free investment that yields that much today. Sudden inflation could also cause a problem.

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The 50/15/5 rule for multiple financial goals
The 50/15/5 rule for multiple financial goals
  • 50% of your income goes toward essential expenses: rent, bills, minimum debt payments.
  • 15% percent goes to retirement savings. They also suggest you increase this by ...