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Any financial expert that you will come across will tell you to make a budget. Even if you came to them to get help for your debt, retirement plan or any other financial goal, one of the things that they will encourage you to do is a budget plan.
We all need a budget regardless of our financial condition. If you have no idea how to start, there is at least one budgeting system that can suit your requirements. A budgeting system will help you create a budget plan. The problem with a budget is it requires some work at the beginning. This is where a system will help you get started. You just have to know what your options are so you will know the tools that you will use to put some order in your financial life.
One of the systems that are commonly used is known as the 50/20/30 budget plan. It is one of the many options that you have and we will be focusing on it in this article.
What does the 50/20/30 budget plan mean?
Believe it or not, some people are frightened of budgeting. But if you think about it, the fear stems from the fact that they have no idea how to do it. Well, you don’t have to be apprehensive because there is a budgeting technique that is perfect for your specific financial needs.
The 50/20/30 budgeting system simply refers to the three percentages that you need to follow when you plan your expenses. Here are the three important parts of your monthly expenses.
50% for the Basic Necessities
The first is the biggest part of your income. 50% of your net income will go to the basic necessities that you have to spend for every month. This includes your home, food, transportation and utilities. Anything that is not included in these four categories is not really a basic necessity. An argument can be made for things like clothing and shoes but these are expenses that you do not have to spend for every month.
20% for your Financial Goals
The next part of this budgeting system involves your financial goals. There are basically two main categories under this part: your savings and your debt payments. If you do not have any debts, then this can entirely be allotted for your savings. Your savings will involve a lot of subcategories like your retirement plan, emergency fund, college education, home repair/maintenance fund, etc. Any financial goal that you may have is included here.
30% for your Discretionary Expenses
The last part of your chosen budgeting system is 30% of your net income. These are also known as your lifestyle choices. These are discretionary expenses that you choose to spend on to support the type of life that you wish to lead. This is where your clothing and entertainment expenses are budgeted. It can also include gym memberships, the Internet, cable, phone, childcare, pet care and other similar expenses.
As you allocate your net income, make sure that you follow the 50/20/30 priority. That means you need to spend on your basic necessities first before you spend on your financial goals. And only after the two are satisfied can you spend on your discretionary expenses.
Important rules about this type of budget program
There are various rules to follow in any type of budgeting system and these will help make your efforts as effective as possible. Here are the specific rules that you have to follow.
It is okay to be flexible.
Feel free to go beyond the 50% and 20% as needed. If you have to sacrifice anything, prioritize in taking it from the 30% of your budget. If you have a lot of financial goals, you can sacrifice a portion of your 30% and possibly a part of the 50% - if it will not compromise the survival of your family.
Never go beyond the 100% total.
Although you are encouraged to be flexible with the percentages, never go beyond 100%. That will be living beyond your means and it usually ends up putting you in debt.
Make sure that your goals are aligned with your life goals.
You will be most motivated to follow your budget if it is aligned with the plans that you have for the future.
Use realistic figures.
Your goals are important but try not to get carried away. Do not let your goals overrun the majority of your budget. Be careful when putting too much restriction on your spending just so you can reach your goals. It will only make your budget unrealistic and very difficult to follow. Use a budget calculator from sites like MappingYourFuture.org to make sure you are keeping your figures real.
Do not forget to budget for fun activities.
The 30% for discretionary expenses are meant to be bigger because we all need the break sometimes. If you budget your entertainment activities properly, you will not be in danger of overspending and you still get to enjoy the things that you love to do.
A budgeting system is there to help make your budget effort more manageable if not tolerable. Here is a video from National Debt Relief that discusses tips on how you can create a budget for your household.