Managing your money is vital when it comes to helping you find the best home within your budget. Not only do you need to organize, but you also need to make difficult budgeting decisions about how to spend your cash. This can be overwhelming, but there’s one smart and simple strategy that makes budgeting simple. The 50/20/30 rule can help you track how much you spend and where you can save more by bucketing your finances into three categories: living essentials, savings and personal spending. Here, Trulia explains how it works.
What it is
The 50/20/30 rule helps you build a budget by narrowing your spending into three categories:
• 50 percent of your income should go to living essentials. This includes your rent, utilities and necessities such as groceries and commuting to work. Keep in mind that this percentage is the maximum you should spend.
• 20 percent of your income should go to financial goals, meaning your savings, investments and debt-reduction payments. If you have loftier than average financial goals—like those who don’t have employer-supported retirement or those whose student debt consumes the entire 20 percent—you may want to consider increasing this percentage.
• 30 percent of your income should be used for personal spending. This is everything you buy that you want, but don’t necessarily need: vacations, entertainment and shopping. This lets you enjoy the money you earn, without going overboard—and you can certainly save if you spend less than 30 percent each month.
Why it works
• Clarity and precision. Having just three simple categories lets you stay focused on your budget and goals as you move toward better financial stability.
• Flexibility and freedom. It works across income levels by having three categories that are alterable depending on your individual circumstance.
• Focus on the future. The savings category gives you a sure-fire way to pay down debt and save for major purchases, such as a down payment and retirement. Recommendations include breaking the 20 percent category into 15 percent for retirement and 5 percent for a down payment on a future home.
How to get started
• Determine your monthly take-home pay. If you have a new job or salary, you can use a free online salary paycheck calculator as a starting point to split your money into the 50/20/30 guidelines. Remember that being self-employed may cause your income to fluctuate per month, so base your rental budgeting on your average monthly income.
• Examine your spending habits. Look at bank, debit card and credit card statements and track all of your spending. Don’t leave out the mid-afternoon lattes, weekly happy hour with co-workers or extra storage for your smartphone. If moving to a less-expensive area is not possible, the living expenses category should cut into the flexible personal spending category until your income rises to overcome the imbalance.
• Plan it out. If your spending doesn’t align with the 50/20/30 Rule, come up with a plan to shift some of your expenses into the correct category buckets. You may need to cut back on splurges or look at a different set of rental listings than what you were planning. On the other hand, if you spend less on living essentials or personal expenses, allocate it to pay off debt or to save for the future.