Using The 50/30/20 Budget Rule in Order to Save Money
The 50/30/20 budgeting rule, which was introduced in the early 1970’s by the economists Larry Dossey and Robert Kaplan, is meant to be a simple way to determine how much income should be put aside for retirement. By having an accurate measure of where you should be putting your money, it becomes possible to plan for retirement properly. For many years the financial planners would recommend that you save some money and invest the rest in the stock market or real estate. While there are certainly risks involved in these areas, you can minimize your risk by putting enough of your income away in a safe place such as a mutual fund account or Certificate of Deposit (CD) in a bank. If you have adequate income and want to ensure that you have enough money to live on until you retire, then the best thing for you to do is invest the money in those places.
In addition to being able to live on retirement income, the purpose behind the 50/30/20 budget rule is to ensure that you never run out of money for living expenses and that you never become bankrupt. It may seem obvious, but the reality is that many people find themselves in deep debt simply because they spend more than they earn. Because we all have a little extra spending cash lying around, we like to go out and buy things that we know we cannot afford. Sometimes we may want to splurge on items that are really enjoyable, but if we are not careful, we may end up bankrupt.
To determine what you can afford to spend on, try to figure out your monthly expenses. Once you have determined this, start to look at your income. Does the income that you get from your job cover everything that you need to live on until you retire? The answer to this question may surprise you. Often people think that if they get a second job, they can afford to spend more money on their lifestyle. The truth is that if your job loses its income, you will not be able to get back to your previous level of living.
For this reason, it is important that you keep track of everything that you purchase with a monthly expense account, and then categorize it into expenditures for living expenses and other costs. You may also want to include some category that are for entertainment. Some people tend to get a lot of their entertainment from outside the home, such as music, movies and television. Other people may focus on shopping, dining out or travel. The idea behind the 50/30/20 budget rule is that you should never run out of money to live on until you retire.
The next thing that you need to consider when using your budget to determine your expenses is to look for ways to save money. Many people think that when they are getting ready to make their first cut in the budget, they should immediately start saving money on their monthly grocery bill and electricity bill. This is not always a good idea. Most people do not understand that one of the best ways to save money is to save on your monthly expenses before you even get to the grocery store. By paying your bills on time, and saving on the things that you buy, you will be able to save a large amount of money on your grocery bill. Once you have paid off your monthly expenses, then you can put some money aside each week to use for your emergency savings or to put into a savings account.
Another way to use the 50/30/20 budget rule is to make a financial goal for yourself and work towards meeting that goal. If you have a monthly goal, set a monetary value for each category of your expenses. Then write down the total amount of the categories that you will have to spend money on, when you get there. Make a chart of your spending, which can include a spreadsheet, or just a plain old paper list. The purpose of this type of chart is not only to show where your money is going, but it can also motivate you to change some of your spending habits.
One last way to use the 50/30/20 budgeting method is to use it as a planning tool when you are on a budget. When you are creating a monthly budget, take the time to make a list of your monthly expenses, and then create a pie chart, using the 50/30/20 rule. You can write down the monthly amount of the categories that you want to spend money on, and then create a graph showing where each category falls on the pie chart.
After you have made your pie chart, and done your calculations, allocate a portion of your monthly income or saving to each category on the chart. You may be surprised at how much money you are spending on things that you don’t really need. If you have a lot of discretionary income, it may be best to just allocate about half of it to the categories on the list that you know you will be using. Once you have allocated your money, you will be motivated to change your spending habits. Remember, once you start living according to the budget, you won’t want to go back! You will find that you are saving a lot more than you ever imagined, and so can everyone else!