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The 50/30/20 Rule to Budgeting: How to Make It Work for You

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We talk quite a bit about budgets. However, just as we are all different, so are the types of budgets that work. If you find that a basic budget is really not for you, you might want to look into the 50/30/20 budget.

What I love about this type of budget is that it really can work where other budgets have failed. It is easy to use and is not as stringent as other budgets, which is why it works better for many.

The 50/30/20 budget is where you look at your income (after taxes) and make sure that no more than 50% goes towards paying your fixed expenses; 30% of your income is used towards discretionary spending and an additional 20% is saved. Sounds pretty easy, doesn't it? Let me show you the practical application of putting this rule into place.

The 50/30/20 Budget at Work

Let's say that your take-home pay is $3,000 every month. Here is what your budget might look like. (Keep in mind, this budget does not include each and every item that your family pays for, including charitable donations, additional vehicle payments, hobbies, etc. It was kept very short and sweet to make it easy to follow).

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Fixed expenses

Mortgage/Rent = $875
Phone = $75
Utilities = $200
Vehicle insurance = $85
Vehicle payment = $200
Credit card bills = $50

Total = $1,485 (49.5% of budget)

Discretionary spending

Groceries = $600
Auto fuel = $150
Restaurants = $75
Clothing = $75
Entertainment = $50
Haircuts = $25

Total = $975 (32.5% of budget)

Savings

Retirement savings = $200
College savings = $165
General savings fund = $200

Total = $565 (19% of budget)

As you can see from this example, fixed expenses and savings are a bit less than the desired percentages and discretionary is higher — but they are close to those amounts.

What is great about this type of budget is that you can change the percentages to make them work for you. So, if you need to set 60% for fixed and 15% for savings, that leaves 25% for discretionary spending.

Those who seem to do better with this type of budget are people who do not have a regular income. For instance, it may be useful if you're paid an hourly rate with a fluctuating schedule or have commission-driven income. This budget is also not as specific when it comes to amounts to spend.

Should you use this budget?

If you are trying to get out of debt, I really would not recommend this type of budget. You need to see exactly where every single penny goes each month so you know what you can put towards paying off your debts. (Remember, high amounts of debt can hurt your credit scores. You can see how your debts may be affecting your standing by viewing your free credit scores, updated each month, on Credit.com.)

Instead, I would use the 50/30/20 Rule if you are debt-free and really do spend more than the same amounts on discretionary items every single month.


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