One of the trickiest aspects of creating your own budget is figuring out how to divide your earnings. You spend a fair amount of money on things you need, but you should budget to buy items that personally interest you. If you’ve ever had trouble developing your budget, then consider using the 50/30/20 rule. It’s a simple, yet effective plan for budgeting that can help you set aside the proper amount of money for different aspects of your life.
Determine Your After-Tax Income
Before you do anything, you first need to determine what your income is after taxes have been taken out. The 50/30/20 plan involves splitting up your yearly income, so you need to figure out how much money you make after you’ve paid your taxes. This is easy to figure out if you earn paychecks through a regular nine-to-five job, but you also need to account for any deductions you make in a retirement plan.
Your after-tax income can be a little trickier to determine if you are self-employed. It can usually be calculated by taking your overall income and subtracting any expenses and tax payments from the total. If you’ve been self-employed for a while, you’re probably familiar with this.
Now that you’ve figured out your income, let’s detail how to split up the money.
50% Towards Life’s Essentials
Half of the money you earn should go towards essential items you need to live. This money is used for food, bills, house payments, car payments, and anything else that you absolutely need to have to maintain a comfortable lifestyle. Since you need to have these things, most of the money you make is used to pay for them.
The biggest challenge is determining exactly what counts as a “need” and what counts as a “want.” Think of it like this: you need to pay money to fix a leak in your plumbing. However, you don’t necessarily need to buy décor to make your home look nice. Keep this in mind so you have enough money to pay your important bills.
30% for Personal Interests
While it’s important to pay for all of the things you need, you should also be able to buy things for yourself that interest you. What’s the point of making all this money if you can’t buy something fun every once in a while? Therefore, 30% of the money you make each year can be put towards things you want, but don’t necessarily need.
This money can be used to buy décor, clothes, video games, and any other products that make you happy. You can also spend the money on a night out with your friends to a restaurant or a movie. You worked to get this money, so you should indulge every once in a while.
20% Should Be Saved
The remaining 20% should be invested somewhere or set aside in a savings account. Life has its bumps, and there will be instances where you need to spend some unexpected cash in a short amount of time. By having money saved, you can mitigate the impact of these unforeseen payments.
Saving money is also important if you plan to have children in the future. For example, you need to pay for a child’s education, so having extra money to pull from can be helpful. Setting aside money like this is also important if you want to retire comfortably.
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