Drafting a budget is like going to a gym class after vacation: You know it's going to be tough, it might make you feel a bit guilty, but it's always worthwhile in the long run. To make things a littler bit easier, Forbes proposes one rule to simplify budgeting. Whether you're drafting your very first financial plan or are well-overdue to update your existing budget, the 50-20-30 rule helps you create a flexible plan that's in sync with your lifestyle. Follow these three simple steps to draft a budget and get your financial act together!
Step One: Tally Your Standard Expenses
Your standard expenses are the necessary costs for living—think rent, groceries, transport, and utilities. They're unavoidable and are usually a standard amount each month. Now, calculate your take-home, or the amount you're paid each month after tax and a retirement contribution, like a 401(k) account. The aim of the 50-20-30 rule is to keep your standard expenses under 50% of your take-home. That means less than half of the pay you receive each month goes to necessary living costs, and the remaining 50% is left over for fun expenses, debt payments, or savings.
Step Two: Set Your Financial Priorities
What are your top financial priorities? This section of the budget focuses on big goals like buying a house, saving for a dream vacation, or starting a business. Aim to allocate 20% of your take-home pay to your top financial priorities. Monthly contributions to a curveball fund (backup money for emergencies) or debt repayment should be put on autopilot so you don't have to manually move the money. If you can't imagine putting 20% of your take-home pay toward savings or big goals, set your own amount and aim to increase it by a per cent at regular intervals until you reach your goal.
Step Three: Set an Allowance
This is the fun part! With the remaining 30% of your take-home pay, allocate funds toward lifestyle expenses like entertainment, shopping, and gym memberships. If you struggle to keep to your budget limit, take cash out at the start of the week—it will make you more aware of your spending because you have to physically hand over cash every time you make a purchase, which is a proven way to curb your spending.
Use the 50-20-30 rule as a rough guide, then after two months tweak the figures to suit your goals and lifestyle. And don't forget to keep track of your daily expenses—try a financial app to save time. And that's it! You're officially one of those financially responsible people with a budget. Now, to hit those savings goals!
Head to Forbes to learn more about drafting your first budget.
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