Essential Expenses—are what you need to maintain the fundamentals of your life.
No more than 50 percent of your take-home pay should go toward your essential expenses. These expenses fall under the categories below:
- housing
- transportation
- utilities
- groceries
Financial Priorities—include your retirement contributions, savings contributions, and debt payments.
Your money should go towards the essential expenses first. Then, 20 percent of your take home pay goes make your contributions to your financial priorities before you do any other spending.
Lifestyle Choices—are personal or leisure choices.
Only 30 percent of your take home pay should go to this category:
- cable
- internet
- phone plans
- charity
- entertainment/hobbies
- shopping
- personal care
The good thing about the 50/20/30 rule is that it’s flexible. For example, if you end up using less than 50 percent of your net pay on the essentials, you can either apply what is left over to your financial priorities or to your lifestyle choices spending category.
Budgeting is critical to mastering your finances. Check out these free budget spreadsheets or create your own spreadsheet to track your spending and see how the 50/20/30 rule will benefit you. You can also utilize Mint.com, where you can set a budget, track your spending, and so much more for FREE!!
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