The majority of people save too little and spend too much without even realizing it. The 50/30/20 rule is a way for you to become conscious of your financial expenses and limit yourself from overspending too much. Spending less on things that don’t matter as much allows you to save more money for the things that do matter more to you.
So, how exactly do you use the 50/30/20 rule? The 50/30/20 rule for budgeting is easy to follow, but it requires some calculations and categorization of spending. Here’s how it’s done:
Calculate your monthly income.
The first step in using the 50/30/20 budgeting strategy is to figure out your post-tax income. This will be simpler if you have a steady income. Look at your payslip to find out how much income you get in each month. Payments that are automatically deducted, like insurance, or loans, should be added back in.
Categorize your expenses for the month.
In order to get an accurate picture of where your money is going each month, you’ll have to look back at what you’ve spent from the previous month. You can do this by looking through your bank statement for the past 30 days. It automatically categorizes all of your transactions into salary, meals and groceries, leisure and entertainment, and more. After that, divide all of your expenses into three categories: needs, wants, and savings.
Keep in mind, a need is an important expense you cannot live without, like paying rental fees. A want is an added desire that you can live without, like eating out at a restaurant. Savings can be referred to as personal fund, paying off debts or setting aside some money for emergency.
To calculate how much you should spend, multiply your salary by 0.5 for needs, 0.3 for wants, and 0.2 for savings.
Let’s say, your salary is RM3,500 a month, and if we are applying the 50/20/30 budgeting rule:
50% of your needs = RM1,750
30% of your wants = RM1,050
20% of your savings and debt repayment = RM700
But, think back. Nothing goes according to plan.
Imagine if your rent is RM800, your insurance is RM150, your car expense is RM350 and the grocery bills for the month is RM500, which all adds up to RM1,800. That exceeds the 50% mark by 1%. It doesn’t seem much. Yet.
Plan your expenses accordingly.
You may start adjusting your budget to meet the 50/30/20 rule, now that you know how much of your salary goes towards your needs, wants, and savings for each month. The most effective way to assess is to keep track of how much money you spend on your wants on a monthly basis. Cutting down on needs can be challenging, thus cutting back on your desires can increase your expenses on needs.
Now you’re ready. Remember to keep track of your expenses on your coming months, and adjust accordingly so you’re not overspending.