The Budgeting Rule Of Thumb

Many budgeting techniques exist, but one of the most widely accepted ones is the 50/30/20 rule

Of the common excuses for not saving or investing money that many of us cling to, not having enough money probably ranks the highest. It is for this reason that we push the need to invest into a far future when we supposedly would have more than enough money at our disposal and would then be able to afford the “luxury” of investing.

But how on earth do you plan to make all that future money if you don’t invest anyway?! A common phrase is that if we don’t save money when we have little, then we still wouldn’t be able to when we have much.

This is because as we grow, our needs and wants grow accordingly. If we don’t budget money now for investing and we spend all the income we earn, we would most likely do same when the supposed torrent of money comes pouring.

The key is to find a convenient budgeting techniques that works for your lifestyle.

Many budgeting techniques exist, but one of the most widely accepted ones is the 50/30/20 rule and it is really very straightforward. The basic rule is that you should divide your income (after tax) into the ratio 50% to cater for your needs, 30% on your wants, while the final 20% goes to savings and investments.

Your needs include all the things you really absolutely cannot do without for survival. It covers your transportation cost, feeding, shelter, important bills, your car, your insurance, and so on.

As your income rises, your needs would adjust to accommodate a higher level of comfort and your definition of a need might also advance, but you have to be able to make a clear distinction between needs and wants.

Wants, on the surface, cover the things you do for fun and entertainment. In more complex budgets, individuals make account for possible party expenses, dining out or going for dates, shopping for the sake of it, changing your phone and so on.

In this simple budgeting plan, your wants refer to those very things. You might be able to do without them, but having them would make you a little happier. With 50% taking care of your needs and 30% taking care of the more luxury items, you would have 20% and this would be used to make you more money through your investments.

Note that savings alone are not sustainable as they would reduce the worth of your cash as inflation rises and time value of money changes.

The real challenge with this arises when you cannot correctly distinguish between a need and a want. For example, is your DSTV subscription a need or a want? You decide.

As your wealth increases, it is normal that your needs now take less of your income. In other words, you might not need up to 50% of your income to cover your needs anymore; you might need only 25%.

The goal of this budget rule of thumb is not to set a benchmark but to offer a starting guide that can now be adjusted. However, the most important part of the budget split is the one with the lowest percentage split.

20% of your funds investing cannot possibly be too much to set aside for the allure of financial security or freedom. Create your budget today and start investing. You would have yourself to be grateful for in no time.

Written by Lawretta Egba.