Personal finance is a headache to many of you. If you fail to make your cash last until your payday, you must wonder whether budgeting works. Despite the fact that it sounds boring and worthless to many of you, it is crucial to keep tabs on your spending.
Many people follow the 50/30/20 rule when it comes to budgeting, and undoubtedly it works to avoid falling short of cash by the end of the month. According to this rule, you divide your monthly salary into three categories: necessities, discretionary expenses, and savings.
You will be spending half of your salary on necessities, including rent, travelling expenses, utilities, food, and debt payments. 30% of your salary will go toward wants. It includes discretionary expenses like cinema, night entertainment, dining out, and the like.
The 20% of your salary will go toward savings. It will include both short term and long term saving goals. This budgeting rule can help you manage your money in a better way, especially if you often look for very bad credit loans with no guarantor to fund your needs.
When you are able to save money, you will less likely need to borrow money. If you are not able to make your money last until your payday, the 50/30/20 budgeting rule can actually help you. You will be more organised with money management.
Perhaps you had been saving money, but you can see significantly grow your nest egg by adopting this budgeting rule. At the same time, you need to understand that this budgeting rule can help you in the long run.
Why does the 50/30/20 budgeting rule not work in the long run?
This budgeting rule is a nice way to stay on top of your expenses, but it is still a theoretical concept. Financial circumstances keep changing, and so do your budgeting requirements.
If you find that the 50/30/20 rule can suit your needs as of now, it does not mean that it will help you after some time. Here are the problems associated with this rule that clearly states that it may not be a good way of budgeting for everyone.
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As a low-income household, you may need more than 50% for your necessities
The rule says that you should not spend more than 50% of your monthly income on necessities, but it is essential that you are able to cover all of your expenses within that size of money. Low-income households, especially those living in expensive cities, will likely need more than 50% of their monthly income to pay for their necessities.
Of course, you will have to create a budget that works for you. Because it works for your friend, it does not mean that it will work for you too. You should try to trim down your budget so you can manage to save money as well.
You should try to cut back on your essentials. For instance, you should try to seek affordable housing. Switch to an area where you can get a home at affordable rent or look for a house that is not expensive if you are seeking a mortgage.
However, suppose you have already trimmed down your budget, and you are still spending more than 50% of your income on necessities. In that case, you will end up with little or no savings for your long term goals, including an emergency cushion for unforeseen expenses. You may also have to cut back on the budget for your discretionary expenses.
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High-income households can dissipate on frivolous things
When you strictly follow a 50/30/20 budgeting rule, you do not realise that your income provides you with more room for saving. If you are a high-income household, you will likely spend more than necessary on discretionary expenses.
This can undoubtedly affect you from reaching your savings goal faster. By following this budgeting rule, you will be able to build an emergency cushion, but the saving rate will be extremely slow.
If you want to see your nest egg significantly growing, you will have to contribute more than 20%. If you are a high-income household, it does not mean that you need to spend 30% of your income on your ants. It is not set in stone that you need to spend this much money on your wants. You should instead try to set by money for long term goals.
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Need to save more than 20% from reaching your saving goals
You may feel that saving 20% of your income is more than enough, but the fact is it is not always enough to reach your saving goals. Building an emergency cushion is one aspect of saving. Do not forget that you need to save money for the golden years of your life.
If you want to build retirement funds, you need to put aside a particular amount of money every month. Of course, it will be more than 20%. Further, if you are looking to buy a car or a house down the line, you will have to save money for the down payment.
Of course, you cannot meet all of these goals by just setting aside 20% of your household income. Some people argue against the rule of spending 30% on discretionary expenses and stashing away 20%. If you also do not like this approach, you can flip it – spending 20% on your wants and saving 30%.
What should you do then?
The 50/30/20 budgeting rule can be very helpful for you to stay on top of your expenses but only in the short run. This will not be a successful approach in the long run. Here is what you should do:
- Make a budget that suits your current financial condition.
- Try to change the budgeting strategy every month.
- Invest money to reach your saving goals quickly.
The bottom line
The 50/30/20 budgeting rule can help you learn to manage your money in the beginning, but it is not an ideal approach for the long run. You should understand your current financial condition and goals and then tweak your budgeting style.
