Have you ever asked yourself “What can I do to improve my financial situation? or What are my financial priorities, and how can I align my spending with them?” Trust me you are not alone! Money, it’s a topic that affects every aspect of our lives, yet many of us struggle to manage it effectively. From paying bills to saving for the future, the way we handle our finances can have a negative or positive impact on our overall well-being. Personally, I have asked myself such questions many times and I still do! Therefore, I found them to be valuable and growth mindset for seeking positive ways to change and improve financial struggles. In this post, as a lifelong learner we are going to learn a popular, simple and powerful approach of managing your money: the 50/30/20 rule. This rule can be your compass to guide you through the personal finance.
1. Essential Expenses: Needs (50% of Your Income)
“The greatest wealth is to live content with little.” – Plato
Imagine your income as a pie, and the first slice, the biggest one, goes towards your needs. These are the things you can’t live without your basic necessities. This category covers your physiological and safety needs such as housing, utilities, groceries, transportation, insurance, and minimum debt payments.
If you want to take action you should aim to allocate around 50% of your income to cover these necessities by creating a budget that clearly outlines your basic necessities expenses. Stick to it and avoid overspending on things that don’t fall into this category. When you keep your needs in check, you’ll have a solid foundation for financial stability.
2. Lifestyle Choices: Wants (30% of Your Income)
“Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” – Franklin D. Roosevelt
Now, let’s move on to the fun part of your wants which can be considered as love and belongness according to Abraham Maslow’s Hierarchy of Needs. This 30% slice of the pie is for the things that make your life more enjoyable but aren’t crucial for survival. This category includes eating out, entertainment, hobbies, shopping for non-essential items, and other leisure activities.
For the action taking, it’s important to control how much you spend on things you want. Instead of always trying to buy more, find fun and entertaining ways to enjoy life without spending too much money. Maybe that means opting for a cozy movie night at home instead of going to the cinema, or trying out affordable hobbies like painting or hiking.
3. Financial Security: Savings and Investments (20% of Your Income)
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb
The last but not the least slice of the pie is reserved for your financial future. This is the 20% that should go into savings and investments. Deciding to limit your spending is like saving for a rainy day, preparing for your future, and finding ways to change and improve your financial situation. This includes putting aside some cash for emergencies, saving for your future, and investing in businesses or other opportunities. For the action, automate your savings by setting up automatic transfers from your paycheck to your savings or investment accounts. This way, you won’t even miss the money, and over time, you’ll be amazed at how your nest egg grows.
Now is the time to take charge of your finances. Start by analyzing your income and expenses, then create a budget that aligns with the 50/30/20 rule which gives you a clear roadmap for managing your money wisely, try it out. By focusing on your needs, enjoying your wants in moderation, and securing your future through savings and investments, Remember, small changes today can lead to significant financial rewards tomorrow.