Rachel, 22, like many young professionals, has no idea where her money was going. Her salary isn’t bad, but by the end of the month, she always finds her bank account nearly empty and left wondering how to budget well?
“I don’t get it. I don’t go on any crazy shopping sprees, but I’m always broke,” she says. “I have friends who buy lots of new clothes all the time, but I don’t see them struggling with money like me.”
But if Rachel would only keep track of her expenses, she’d see how her unnecessary expenditures have added up. She would hardly ever eat any meals at home—almost every day, she’d pick up coffee and breakfast at Starbucks, a sandwich from a nice deli for lunch, and go out with work colleagues for dinner every now and then. She took a yoga class twice a week, and on the weekends, she’d go out with friends to catch a movie or have a few drinks.
Without any sort of budget, she was spending money left and right. By themselves, none of these things cost a huge amount, but they added up. No wonder she couldn’t build up any savings!
How to budget with the 50/20/30 rule
One budget method that many people swear by is the 50/30/20 rule. This rule basically gives you some flexibility by not listing down every expense item, just the categories they fall under. Here’s how it works:
- 50% of your income should go to the essentials—those fixed costs that you can’t do away with, like rent, utilities, transportation for work. Any subscriptions like Netflix and gym memberships should also fall under this category, since you’ve already committed to paying for them every month.
- 20% of your income should go to building up your financial health. This includes putting money away in a savings account, your retirement, investments, and so forth.
- 30% is your disposable income. These are your non-essentials, like a nice meal at a restaurant or travel.
Of course, these are just guidelines. Your fixed costs may not take up 50% of your income, and you may not spend all 30% of your income on fun things. In that case, put the extra money into investing in your financial health.
Spending less on fixed costs and disposable categories is great, what you have to remember is you shouldn’t cross these thresholds.
If the 50-20-30 ratio doesn’t work for you, you can tweak it to suit your lifestyle better. You could turn it to 60-30-20 or 40-40-20. The key is knowing how to budget and being aware of where your money is going. That way, you can save up for your future while still having fun in the present. How to budget is no mystery now!