Creating your monthly budget doesn’t have to take hours of color coding expenses. No one has time for that! Save your stress for the unexpected, and follow the easy 50/20/30 rule, courtesy of Elizabeth Warren.
Why the 50/20/30 Rule Works?
Breaking your expenses down into 20 categories is unnecessary and too much to keep track of. With the 50/20/30 rule, you only have to worry about 3 types of spending. Did I just hear a sigh of relief?
This idea of budgeting is flexible, by altering the percentages to make it fit your needs because everyone’s budget is unique. The idea is to take control and stay consistent in how you manage your money every month. By following these 4 quick steps, you can make sure you are covering your expenses, being responsible for the future, and even treating yourself at the end of the day.
Step One: Calculate Your Take-Home Pay
Your take-home pay is the amount of earnings after all deductions have been taken from your gross pay, such as state, local, Medicare and Social Security taxes. This figure will be used to allocate your budget into three main categories; essential expenses, financial goals and flexible spending.
Here you will find a Salary Paycheck Calculator to help you estimate your New York taxes.
Step Two: Set Aside 50% for the Essentials
Review your monthly expenses and highlight all of your “needs” such as groceries, house payment or rent, utilities and insurance payments. If you’re struggling to determine what qualifies as a need, ask yourself “what will the consequence be if I skip this expense?” If the consequence is more than a temporary dissatisfaction, chances are it’s an essential expense.
For example; your cable bill may seem like a need, but is your survival that dependent on catching up with the Kardashians?
However, according to Warren, anything that could negatively affect your credit score would also fall under the “needs” category. So although taking out a credit card to help pay for your summer vacation may have been a “want”, the repayment expense would be considered a “need”.
Step Three: Set Aside 20% for Financial Goals
Did you know, the American Psychological Association has found that money has been the #1 source of significant stress for 67% of Americans, since 2007?! Sure, it makes sense, but chances are if you don’t have a strong financial foundation, you are a part of that 67%. Good news is, today is a great day to make a change in the right direction.
At least 20% of your take-home pay should be allocated to your financial goals. These include your retirement contributions, savings and debit payments. It is important that you put this money aside AFTER your essential expenses, but BEFORE you do any other spending.
Step Four: 30% for Flexible Spending
Going to the movies, eating out, gym memberships, hobbies, pets, and yes even your cable and internet would all qualify as flexible spending, because you could totally live without all those lifestyle choices. It’s important to make sure that your discretionary spending does not exceed 30% of your take-home pay. It is also important to not feel guilty about purchasing that purse you’ve been eye-balling for months, AS LONG AS it falls within your “flexible spending budget”
[Quick Tip: Look for areas you can minimize costs and reallocate that money into savings…Think if you could minimize your cable bill of $170 to $70 (for internet and a Netflix subscription) and save $100 per month, that easy. The only inconvenience you may have is getting the local news from the web instead of Channel 2.]
If you would like to learn more about customizing your budget and how to best allocate your income for savings, stop into our main branch to meet with our Financial Advisor!