Do you ever find yourself staring at your paycheck and wondering how you’re going to make it through until the next one? Perhaps you seem to spend too much and never manage to save any, or you don’t quite know how to pay off your debt without sacrificing your lifestyle. According to financial experts, the key to financial stability is the 50/30/20 rule, so how does it work?
According to the experts, it doesn’t matter how much you earn; after tax, your money should be split three ways. 50% of it should be for living essentials such as rent, bills, groceries and gas, for example. These are the costs that you have to pay out every month to live. 30% of your overall after-tax income can be used for flexible spending, which can be anything you want but perhaps don’t necessarily need, such as eating out or buying yourself treats. Finally, 20% should be set aside for financial goals, which can be put into your savings account, invested, or to help pay off debts.
20% is too much?
If you have been living a certain way for the past few years, this method can be challenging to get the hang of straight away, and perhaps 50% of your income isn’t enough to cover all your needs. If that is the case, make your 20% savings a little smaller for a few months and slowly build it up. Small steps can make a big difference.
Automation is key
To make this whole system work for you, try to automate as much as possible. If you have a set salary every month, you can set it up so that your 30% for ‘wants’ goes into one account where you can spend away as you like, and the 20% immediately goes into savings or is set to pay off a credit card for example. This means you won’t accidentally end up spending money that is earmarked for something else. The more of a habit you make something, the easier it is to get used to it.
Some months you might not find that you need to spend all of your 30% on shopping, hobbies, eating out, etc. Just because it’s there, doesn’t mean you have to use it all every month. Anything you don’t spend can be carried over to the next month, or if there is ever something a little pricier, you want to treat yourself too, or even just added to your savings. Seeing that savings pot grow will really motivate you!
Even if you use this technique, it’s a good idea to regularly look at where your money is going. Do you have any bills or contracts that you could negotiate or change? Could you move your credit card debt to a 0% interest card to pay it off quicker? Keep an eye on your finances, and you can continually be improving them.
So, why not give the 50/30/20 method a go and see if it can work for you!