Budgeting – The 50:30:20 Rule
Budgeting is a key component of financial success. By creating a budget and sticking to it, you can take control of your spending habits, ensure that your funds are being applied to your priorities, save and invest for the future, and live within your means to avoid unnecessary debt.
50:30:20 Rule
One of the most effective ways to budget is by using the 50:30:20 rule. This rule, popularized by US Senator Elizabeth Warren in her 2005 book, All Your Worth: The Ultimate Lifetime Money Plan, states that 50% of your after-tax income should be allocated to necessities, 30% to things that make life a little nicer but aren’t necessary, and 20% to paying down debt or adding to savings.
Mary’s Budget
For example, let’s say Mary earns Ksh 40,000 per month. Using the 50:30:20 rule, her basic needs should amount to Ksh 20,000. From that, she can allocate Ksh 10,000 towards rent or a mortgage, Ksh 3,000 towards transportation, Ksh 4,000 towards food expenses, and Ksh 3,000 towards home utilities. Her budget for wants (such as entertainment, clothing, and accessories) would be Ksh 12,000, and her savings budget would be at least Ksh 8,000. In this scenario, Mary could consider investing her savings in a Money Market mutual fund.
| Category | Percentage | Amount |
|---|---|---|
| Income | 100% | 40,000 |
| Necessities | 50% | 20,000 |
| – Rent/Mortgage | 25% | 10,000 |
| – Transportation | 7.5% | 3,000 |
| – Food | 10% | 4,000 |
| – Utilities | 7.5% | 3,000 |
| Wants | 30% | 12,000 |
| – Entertainment | 10% | 4,000 |
| – Clothing | 5% | 2,000 |
| – Accessories | 5% | 2,000 |
| – Helping Parents | 10% | 4,000 |
| Savings | 20% | 8,000 |
It’s important to note that the 50:30:20 rule may not apply perfectly to everyone. Some people may have more responsibilities that require a larger portion of their income, while others may have a lower income that makes it difficult to keep necessities at 50%. Regardless, the 50:30:20 rule can be a good guide to help you budget and live within your means while still saving consistently.
Other Alternatives for Budgeting
While the 50:30:20 rule is a popular budgeting method, it’s not the only way. Other methods include envelope budgeting, in which cash is allocated to specific spending categories and physically placed in labeled envelopes, and zero-sum budgeting, in which all income is allocated to specific expenses, savings, and investments, with no money left over at the end of the month.
No Budget Lifestyle
It’s important to understand the consequences of not budgeting and overspending. It can lead to falling into debt, not being able to meet unexpected expenses, and long-term financial strain. It’s recommended to track your expenses, set specific financial goals, and avoid impulse purchases in order to stick to your budget.
Give it a Try
Budgeting is a crucial step in achieving financial success. The 50:30:20 rule is a popular and effective method, but it’s important to find a budgeting method that works for your individual needs and goals. By budgeting and living within your means.