Yahoo Finance 5 Ways To Alter the 50/30/20 Rule To Suit Your Savings Plan
Ask anyone and they’ll tell you budgeting isn’t the funnest activity in the world. But it doesn’t have to be complicated, either. The 50/20/30 budgeting rule is a popular system to help you set aside money into three broad spending categories.
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In sum, the guideline recommends spending 50% on needs, 30% on discretionary expenditure, and 20% on savings and debt repayment. But customization is the key to making this rule work, said Jeff Mains, a finance specialist and CEO of Champion Leadership Group. “If housing or healthcare are expensive, you may need to spend more than 50% on basics,” said Mains. If you have a high income but minimal necessities, however, you might give less than 50% to this category.
Here are more ways you can alter this savings rule to work in your favor.
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1. Flexibility Is Key
“In a role like mine, where income can fluctuate, adaptability is important,” said Melissa Terry, a CFA at VEM Tooling. In her experience, adjusting these percentages has become vital. “For example, during periods of higher income, I may allocate more than the recommended 20% to savings and investments. This provides a buffer for smaller months.”
Say you just got a promotion at work or you’re a freelancer with some months that are more profitable than others–this is where you’d apply the above rule of thumb.
Terry noted that it’s also crucial to be flexible in reducing the portion of your savings temporarily if faced with unexpected expenses or lower income.
“When my income increases, I set aside 25% for savings. This has allowed me to build a sizable emergency fund that gives me peace of mind in uncertain times,” she explained. “On the other hand, during a bad month, I temporarily reduce my savings rate to 15% to direct those funds to needs and maintain financial stability.”
The above advice is particularly poignant at a time when a looming recession could be underway and might result in job loss. According to Terry, it’s important to find the strategy that works best for your personal situation. “Remember, flexibility is the key to your budget.”
2. Prioritize Savings
Building up savings allows you to work towards your long-term financial goals like retirement, homeownership, education, and other major life events. The earlier you start saving, the more time your money has to grow through compound interest, making it easier to achieve these goals.
Experts agree that If your needs are well below 50% of your income, you might adopt a more aggressive savings approach, such as 40/30/30 or even 30/40/30, where a larger percentage is channeled into savings and debt reduction. “The key is aligning your budget with your specific financial objectives and circumstances,” said Zach Larsen, a finance and investment expert and owner of Pineapple Money.
CEO of DebtHammer, Jake Hammer, said that making the 50/30/20 rule work for you is all about swapping out percentages to create your ideal budget.
“This easy alteration can make a significant difference in the amount you save annually,” he noted. If your required expenses exceed the 50% mark because of excess debt, temporarily increase the amount you put toward these expenses by paying off one debt at a time. “This will enable you to sustainably abide by the 50/30/20 system in the future.”
3. Determine What You Really ‘Want’ Versus ‘Need’
You should always make sure to personalize your budget by making tweaks that match your income and financial priorities. “The 50/30/20 budgeting rule is a handy way to handle your money,” said Rob Whaley, a finance specialist at Horizon Finance Group. “But you can tweak it to match your earnings and must-pay bills.”
He suggests starting by checking out your financial situation to make it work for you. If your income isn’t sky-high, think about slicing a bit from the ‘fun’ category (the 30%) and giving a little more to the ‘essentials’ (the 50%). But if you’re making good money, you can save more and have more ‘fun.’
Knowing the difference between needs and wants can also help you avoid overspending on discretionary items that aren’t vital to your day-to-day life. This can prevent you from living beyond your means and accumulating unnecessary debt.
“It’s important to nail down what you really ‘need’ and what’s more of a ‘want’ based on your situation,” noted Whaley. Some stuff might fall into either bucket, depending on what’s going on in your life. Be sure to adjust these percentages to fit your goals and what’s important to you.
4. Regularly Review
Life is constantly evolving and so is our financial situation. You might have unexpected expenses crop up on you in one season and rejoice with extra income in another. For this reason, it’s important to stay flexible and adaptive.
The 50/30/20 rule is relatively easy to follow because you only track three categories, it allows you to set spending boundaries, and it isn’t as intimidating as other systems. But for it to be most effective, you need to regularly review your percentages to help you identify areas where you can optimize your budget.
You might discover, for example, that you’re overspending in certain categories (like dining out and retail therapy) or missing opportunities to save more. By making these adjustments, you can make your budget more efficient and aligned with your financial goals.
5. Don’t Judge Your Situation
Not everyone’s finances will look the same, and that’s okay, said the experts. “I have no doubt that there are many people needing to use a higher percentage of their income just to cover living expenses,” said Bethany Hickey, a personal finance writer for Finder. “Your 50/30/20 may be more like a 70/20/10.”
She emphasizes that as long as your living expenses are covered and you’re still building some savings, you can always adjust how you need to get by. That said, she recommends being sure to prioritize savings over wants.
“Future you will thank you later,” she said.
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This article originally appeared on GOBankingRates.com: 5 Ways To Alter the 50/30/20 Rule To Suit Your Savings Plan
