The kiss of death for budgets is overthinking. Simplifying the budgeting process can help increase the likelihood of financial success. One of the simplest ways of budgeting is using the 50/30/20 rule to assign net income into three simple budget categories:
- 50% allocated to needs
- 30% allocated to wants
- 20% allocated to debt repayment and savings
Needs
Needs include things that would dramatically alter your lifestyle if they were not paid, such as home, water, groceries, shelter and transportation costs. Other necessities like utilities, medical costs, maintenance, taxes, insurance, etc. would also be included in this portion of the budget.
Wants
Which budget items are needs and which are wants? That is something each household has to determine. One method to determine needs from wants is to rank expenditures in order of importance. Using this ranking system will help determine which expenditures are most important if financial circumstances change.
Debt repayment and savings
For this budgeting theory, debt repayment includes any debt outside of needs, such as housing and transportation. These debts may include credit cards, student loans or personal loans. Savings should include emergency and goal savings, such as retirement and education funds. This allocation helps to ensure the ongoing financial health of the household.
This simple approach to budgeting can also be used as an assessment tool to measure if there is overspending in a particular area. This can be an early warning sign of future budget problems. When overspending occurs, early detection is key to protecting financial health. Though there are many budgeting options, the best option is the one that fits your individual lifestyle.