The 50/30/20 rule
Another budgeting technique is the 50/30/20 rule. It involves dividing your monthly income into three "buckets":
- 50% (or less) goes to necessities such as housing, student loans, and utilities. These are expenses you have to pay every month.
- 30% (or less) goes to nice-to-haves, such as entertainment, hobbies, and travel.
- 20% (or more, if possible) goes toward savings and paying down debt.
You can adjust the 50/30/20 rule based on your short- and long-term goals, but be careful about confusing "nice-to-haves" for "necessities." Several dinners out each week and unlimited data plans may be nice to have, but they aren't essential.
TrackingOpens PDF takes the most time, but it provides the greatest insight into your spending habits.
Use a spreadsheet, an online service or, if you prefer to go "low tech," a notebook and pen will work just fine.
First, create columns for your spending categories (e.g., groceries, gas, utilities, medical, entertainment, and child care). Add a "miscellaneous/unexpected" and a "savings" category, as well.
Next, divide your monthly income among the categories and then pay your bills/save accordingly. It's important to list all items and subtract the amount you spend in each category, so you know where your money is going. Once a category is "out of money":
- Stop spending in that category if possible, until you get your next paycheck
- Consider making trade-offs by moving money around from other categories
You stretch your money in many directions. Daily expenses, entertainment, life events, and long-term goals all compete for the same dollar. Budgeting can help ensure you’re covering the necessary monthly expenses, saving for the future, and—maybe—have some extra cash to reward yourself for your good work.