The 50-30-20 Budget Rule Is The Simplest Way To Manage Your Finances If You’re A Young Professional
Have better control over your finances.
Did you find yourself saving more money during the pandemic? Theoretically, there’s no reason not to since the lockdown has made many of the things we used to spend money on – transportation, new clothing, entertainment – unnecessary or unavailable.
In reality, however, it’s not that simple. Different circumstances can prevent us from reaching our financial goals, but it may also be worth revisiting your budgeting style.
Why should you start following budgeting methods?
Budgeting means creating a plan so you can use your finances wisely.
Sherwin Migrino, a senior software engineer and a financial consultant, says, “When you budget, it is [easier] to achieve your financial goals [since] you have a plan to follow. It will guide you on your spending decisions and savings habits. If you fail to plan, you plan to fail,” he says.
With so many temptations to use your credit cards for ‘buy-now-pay-later’ schemes, and banks making it so convenient to apply for loans, it is easy to get carried away. Having a budget lets you allocate your resources properly and gives you a better sense of control over your finances so you can keep out of debt or be on your way out if you currently have some.
However, if you feel like the method you are following now is not working anymore, here’s a simple and basic budgeting rule you can try.
The 50-30-20 method: What is it?
The 50-30-20 budgeting rule is one of the simplest and easiest methods to follow since it divides your monthly income into three major categories only.
As shared by Faye Sadiarin, a financial advisor at Sun Life, “[The] 50-30-20 budgeting method is universally acknowledged and is proven effective. I can say that this method would work well for the [single] young professionals because they have less responsibilities.”
Sherwin says, “It’s easy to follow and can be adjusted. When I became a financial consultant, it made more sense to me that the 20% is not just for savings but for your financial goals too.” Thus, he decided to divide his 20% into two: 10% for savings and 10% for his investments in life and health insurance.
How does this rule work?
The first step to budgeting is to be aware where your money goes. You also need to identify which of these are “needs” and “wants.”
“It may be the [most] crucial part of budgeting, but don’t be confused between the two. Live within your means, apply the method that works for you and always remember the importance of savings,” advises Faye.
50% of your monthly income: NEEDS
These are expenses that you can’t avoid because they are necessities: shelter, food, water, and other essentials like transportation, electricity and water.
If the total amount of your needs is higher than the allocated 50% in the budget, making some adjustments is absolutely acceptable if it will result to a healthier financial life.
“You can personalize this method based on your own priorities, needs, and current life stage. If you spend too much on your needs, you might want to consider a side job or try to downsize your lifestyle,” Faye explains.
30% of your monthly income: WANTS
This is where the extras fall under: dining out or food deliveries, subscriptions to streaming services, makeup, travel, and hobbies. Anything on your “wants” list is dispensable, and could easily be added to your savings if you will it.
20% of your monthly income: SAVINGS and DEBT
This 20% is what could help you get out of debt and keep your finances fluid. Your emergency fund and the money you’re saving for your retirement also falls here.
According to Eric Whiteside of Investopedia, “You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.”
Is the 50-30-20 method doable?
To illustrate, here’s what your 50-30-20 budget would look like if your take-home pay is Php 25,000:
50% Needs – Php 12,500
30% Wants – Php 7,500
20% Savings and debt – Php 5,000
Can you see it now? The key to making any budget system work is in having the discipline to stick to it. However, don’t be afraid to adjust your budget especially in these tough times. What’s important is that you track your progress so that you can keep yourself motivated until you reach your financial goals.