Knowing when to spend and when to save isn’t always easy. If you’re not sure where to start, the 50-30-20 rule is a pretty standard breakdown of your finances.
“The rule calls for allotting 50% of your income for fixed expenses, 20% toward saving and retirement goals, and 30% toward guilt-free spending,” says Ellie Thompson, CEO of Money Therapy. Thompson adds that the magic of the rule comes from sticking with percentages rather than keeping tally of a strict budget. “You’ll feel freer and more in control of your income instead of [feeling] tied down to track every expense.”
Below, Thompson shares three tips to help you follow the 50-30-20 rule.
Create an emergency fund first
Sweating your student loans or other low-interest debts? Thompson says to take a deep breath and use your 50% allotment to focus on building up an emergency fund first. “Aim to build an emergency fund of at least $1,000 to start, so you’re equipped to handle financial hiccups,” she advises. “The order of operations should be to create an emergency fund, pay down as much debt as you can, and then tackle saving and investments. One common mistake I see is saving too much instead of tackling debt. Once you get out of debt, you’ll be on the way to sustainable saving and financial freedom.”
Adjust anytime you need to
Good news: the 50-30-20 rule is a guideline that you can adjust as you go. For example, you might consider switching out the percentages if you’re stuck with expensive rent or a ton of payments. “The 50-30-20 rule can be altered if you are in extreme debt, such as owing more than $50,000.” Thompson explains. “If this is you, try putting a higher percentage toward payments and a smaller percentage toward your wants for a while.”
Set a savings goal and stick to it
Ready to follow the 50-30-20 rule and regularly put a set percentage of your paycheck into savings? Thompson says automating it can be a huge help. “Your only job is to log into your bank account, pick a date and amount to regularly transfer, and sit back and relax. Saving won’t have to be something you think about when it happens automatically.”
xx, The FabFitFun Team