How to Create a Great Budget with the 50/20/30 Rule

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How to Create a Great Budget with the 50/20/30 Rule

At ARIIX, you can usually hear us talking about money. That’s because we believe that solid finances are one of life’s many portals that lead you to your maximum potential. If you’re always worrying about how you’re going to make this month’s rent or pay bills, can you truly enjoy all the world has to offer?

We don’t think so, and that’s why we often stress the importance of a strong budget. Budgeting may not sound fun. In fact, many of us cringe when we hear the word, thinking longingly of all the things we can’t do when we are tightening the drawstrings of our personal finances. But rather than viewing a budget as a negative thing, look at it as something that, if done correctly, can lead to major success in your personal financial world. This is where the 50/20/30 rule comes into play. Never head of it? Perfect! This is what it looks like:

50%: You should try and ensure that your household’s monthly fixed expenses fall below 50% of your take home pay. This is what this looks like at a very basic level:

Note: everyone’s fixed expenses will vary from house to house.

For all categories, we are assuming a $5,000 a month take home pay.

Mortgage 1,000
Homeowner’s insurance 100
Car loans 200
Student loans 300
Phone/Cable/Internet 300
Auto insurance 100
Family medical insurance 200
Utilities 300
Total: 2,500 (50% of $5,000)

20%: Your next category is savings. This rule implies that you should be squirreling away at least 20% of your take home pay every month. While we agree that this is indeed a good starting point, it is only a minimum and we like to emphasize the importance of saving as much as possible every single month. Your savings could look something like this:

401k contributions 600
Emergency Fund 100
College savings plans 300
Total: 1,000 (20% of $5,000)

This is a perfect example of where this rule might not work for everyone. If you notice, in this scenario, the family is only contributing $600 a month to a 401k retirement savings plan. That means only $7,200 is being put into this account annually and the maximum contribution, as of 2016, is $18,000. This amount is most likely significantly too low and should be increased if possible.

30%: The final category is where you will find a little more wiggle room. It’s considered the flexible spending portion of your budget. This is the easiest area to tighten up during financially difficult times or if you decide you would like to save more than 20% of your paycheck. Also, there may be times that your fixed income exceeds that 50% suggestion, perhaps while you’re in between jobs or renting and owning a home simultaneously, so this is the category you adjust to make up that difference. Examples of these items include:

Groceries 400
Clothing 100
Entertainment 50
Travel 150
Gas 300
Gifts 100
Dining out 100
Vet/grooming 200
Total: 1,400 (28% of $5,000)

If you were paying close attention you’d noticed that we only spent 28% instead of 30% in the flexible category. This means that the left over 2% (or $100 a month) can go into savings instead! Good job budgeting and having money left over at the end of the month!

This is a very basic means to begin budgeting your finances. As we previously stated, this rule won’t work for everyone. Some families have higher necessary expenses every month while others may be spending far too much in the flexible category. This is simply a rule to begin noticing where your money is flowing. It’s a good place to begin so that you can set yourself up for financial success in the future!

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