The 50/30/20 budget rule is a cornerstone principle among saving techniques. Especially when you own a business, or are a freelancer with an unsteady income, making headway on proper money flows each month can be quite problematic.
Therefore, it is important to develop a habit of splitting your after-tax income into separate buckets, each for a different purpose. The popular 50/30/20 budgeting rule is all about this! Read on to find out how it works, why it matters for businesses, steps to manage it properly, and some alternatives that may suit you better.
What Is the 50/30/20 Budget Rule?
The 50/30/20 budget rule is a simple saving strategy that can help you better manage your finances. The rule suggests that you should:
- Allocate 50% of your after-tax income to essential living expenses, such as rent, groceries, utilities, transportation, and healthcare.
- Save 20% of your income for long-term financial goals, such as retirement, business equipment, new office, etc.
- And finally, 30% of your income is available for discretionary spending, including nights out, travel, and other non-essential items.
The idea behind the 50/30/20 budgeting rule is that by allocating a set percentage of your income to specific expenses, you will be able to better manage your money and reach your financial goals.
Why Does the 50/30/20 Budget Rule Matter for Businesses?
The 50/30/20 budget rule can be especially helpful for businesses, as it can help you better manage your business finances. When you are self-employed or have an irregular income, it can be difficult to know how much money you should be putting away each month.
If you try to sort your finances differently each month, you may end up tweaking your budget each time something new comes up (that you may not necessarily need). This may turn into a time-consuming and tiring task with questionable results.
The 50/30/20 budget rule can help you allocate your income in a way that will allow you to cover your essential expenses, save for long-term goals, and still have some money left over for discretionary spending.
How To Apply the 50/30/20 Budget Rule: 6 Steps
There are a few simple steps you can take to start using the 50/30/20 budget rule in your own life:
1. Determine your after-tax income. This is the amount of money you have left over after you have paid all of your taxes. This would be quite easy if you receive a defined amount each month, or are paid based on retainers. However, if your earnings vary, you better prepare a mock-up 50/30/20 budget in the middle of each month and plan your workload ahead.
2. Calculate your essential expenses. Next, you will need to calculate your essential expenses. This includes all of the costs associated with keeping yourself alive and healthy, such as rent, food, utilities, transportation, and healthcare.
3. Determine your long-term financial goals. Once you have calculated your essential expenses, you will need to determine your long-term financial goals (what amount you’d like to sock away for larger future projects). This could include saving for retirement, buying a new car, or starting a new business venture.
4. Decide on a discretionary spending budget. You will need to decide on a discretionary spending budget. This is the money you have left over after you have paid your essential expenses and saved for your long-term goals. You can spend this money on anything you want, but it is important to be mindful of your finances.
5. Stick to your budget. The most important step is to stick to your budget. Make sure that you are allocating the correct percentage of your income to each category and avoid spending on a whim.
6. Review and adjust as needed. Finally, it is important to review your budget on a regular basis and make adjustments when necessary. This could mean increasing your savings rate if you are not on track to reach your goals, or cutting back on your discretionary spending if you find that you are overspending in that category.
Why Is Budgeting Important For Businesses?
Budgeting is important for businesses for a number of reasons. First, it can help you better manage your finances and allocate your income strategically.
Second, budgeting can help you track your earnings and make sure that you are not overspending in any one area. This applies to personal money management habits but is especially important for businesses, as overspending can quickly lead to financial trouble.
Finally, budgeting can help you make informed decisions about your business finances. When you have a clear understanding of where your money is going, you can make room for creativity and innovations that may require extra resources.
The bottom line is that budgeting is an important tool for businesses of all sizes. If you are not currently budgeting, now is the time to start. By taking the time to create a budget and stick to it, you will be on your way to financial success.
50/30/20 Budget Rule Alternatives
If you find that the 50/30/20 budget rule doesn’t work for you, there are a few alternatives that you can try.
One option is the 80/20 budget rule. This rule allocates 80% of your income to essential expenses and long-term financial goals, and 20% to discretionary spending.
Another option is the 60/30/10 budget rule. This rule allocates 60% of your income to essential expenses, 30% to long-term financial goals, and 10% to discretionary spending.
Finally, you could try the 50/40/10 budget rule. This rule allocates 50% of your income to essential expenses, 40% to long-term financial goals, and 10% to discretionary spending.
Whichever budget rule you choose to follow, the most important thing is that you stick to it. By being mindful of your spending and making sure that you are allocating your income in a way that aligns with your financial goals, you will be on your way to financial success.
The 50/30/20 budget rule is a simple but effective way to sort your money. By allocating 50% of your income to essential expenses, 30% to long-term financial goals, and 20% to discretionary spending, you can ensure that you are on track to reach your financial goals.