Do you know how to budget? While many people say they know how to budget, realistically very few can plan their finances in the most effective way. Failure to a budget can be equated to planning to fail financially. The difference between successful individuals and those who struggle financially is actually financially. Do you think people in the same level of income have the same living standards? Not at all! Some appear to be very successful while others are actually struggling. The underlying difference between these individuals is how they use what they earn. There is yet another example you may want to think about.
Why is it that even those who earn a lot of incomes struggle with debt? The answer is simple – poor budgeting of their income. Am telling you, friend, what matters is not the amount you earn, but rather how you use what you earn. Trust you me if you can plan well for the little you earn, you can turn out to be very successful in life. That is why it has become very important for us to discuss how you can effectively budget for your money. Pay attention to get the answer to the question -What Is the 50 20 30 Budget Rule?
The 50 20 30 Budget Rule?
What Is the 50 20 30 Budget Rule? Well, this is an effective budgeting system developed by Senator Elizabeth Warren back in the year 2005. Elizabeth Warren is among the most influential individuals of all times the world has seen. How do you apply this system? Let us break it down.
• Determine your After-Tax Earnings. In general, your gross salary is not what you often carry home. Generally, the after-tax income is what you remain with when all the taxes have been deducted. If you are a self-employed person, less your total expenses, including the taxes you pay, from your gross income.
• Restrict your needs to 50% of the income you carry home. Needs are the basics you cannot do without and may include mortgage or rent, groceries, and insurance premiums. The most important thing here is to divide your expenses into needs and wants. The expenses can be foregone are wanted. However, the expenses that can severely damage your life when foregone are needs. In most of these needs are fixed and will be there every month. You need to spend a maximum of 50% of your net income in them.
• Spend a maximum of 30% on Wants. Using 30% on wants sounds interesting! Think of a pair of shoe, hair-dressing and such. But do you remember the definition of needs and wants? We said you can forego wants. It is, however, important to note that extravagances do not feature in this category. Here we are talking of the fundamental niceties of life such as communication, special home bills and cosmetic repairs of your auto. Spend a maximum of 30% on these things. Yes, the rule may sound strict and ridiculous but it is really sensible and can save you a lot.
• Incur the remaining 20% on Savings and Debt payment. It is important to pay yourself every time you receive your net income. You need to save 20% of your after-tax earnings. Save for emergency and retirement. This is what we mean by paying yourself. This is still your money will help you significantly in the future. Do you owe lenders? Devote a section of this amount to repayments. You need to clear your debts in order to enjoy the fruits of your work. The amount you pay as interest can be used in another meaningful way.
Many people have benefitted from this rule. It is practical and will help you a lot. Put into practice and see for yourself.
Why Most Fail
In order to successful budget effectively, you must understand the snares that often make individuals victims of poor spending. If you understand these traps, avoiding them will make you a success i9in budgeting. Here are some of them:
• Being unrealistic. Many people come up with a very tight budget but cannot follow it. What is the danger of being too restrictive? You will lose the motivation to keep following your budget. For instance, your budget says you need a $70 for entertainment but you end up using $140. This only shows your budget is unrealistic.
• Bad company. There is an old saying that goes this way – bad company ruins useful habits. This very true in a financial sense. If you spend your time with individuals who spend carelessly, you are likely to be affected by such behaviors. You may know that much later when you are already in troubles. So spent your time with individuals who have respect for budget and you will maintain good spending habits.
• Lack of ambition. As your budget, list some of the things you want to achieve in the end. Do you want to get out of debt? Is there an asset you want to acquire? Setting some goals will give you the drive to continue following your budget. In contrast, failure to set goals will deny you the motivation you need.
• Unrealistically comparing yourself with others is a financial poison that kills. People have different journeys. Do not compare yourself with them unrealistically. Do not force yourself to live the kind of life you cannot afford at the present. Simply follow your budget and you will be okay in the end.
• Borrowing too much. This is yet another financial poison. If you borrow a lot, you will have to incur too much on interest payment. These payments may become unaffordable. Your budget will no longer be meaningful. Avoid debt as much as you can. If you run out of options and you want to borrow online check Bugis Credit they have reasonable rates. Otherwise, other lenders can give you interests that are often high and can ruin your financial life.
The Bottom Line
What is 50 20 30 Budget Rule? This is a budgeting system that requires you to use spend on needs, wants and savings 50%, 30%, and 20% respectively of your net earnings. It has proved effective and saved many who initially struggled financially due to poor budgeting. Apply it and you will benefit a lot. However, to successfully apply it, avoid the snares we have discussed in the final part of this discussion. In our next discussion, we will have a practical example of this budgeting system. Thank you!