Unnecessary, emotional and chaotic spending often brings financial problems. Specialists propose a solution for optimizing recurring expenses: the 50/30/20 method.
Budget planning saves us from unnecessary expenses. PHOTO Shutterstock
Lack of budget planning is one of the causes of financial problems. With the help of a simple and effective strategy, we can avoid blockages and even make investments, in addition to the usual expenses, and, in addition, we will have a budget for vacations.
The 50/30/20 method is considered one of the most effective personal budget planning formulas.
First of all, we need to make our personal monthly budget with the amounts that come to mind, divided by income and expenses. It is not mandatory that the numbers are fixed from the beginning, but approximated as best as possible, but it is important to go through them all, and then revise them.
Then we order the expenses according to the 50/30/20 method (50% – satisfying everyday needs, 30%, expenses for satisfying desires and 20% of the income we allocate to savings), according to the Money School.
How we apply the 50/30/20 method
It is about three simple steps, namely:
- 50% of the income is allocated to meeting needs such as: housing, daily shopping basket, utilities, bills, transport, etc. If we can't fit into the 50% percentage, it's a sign that spending should be reduced. If the income is enough so that half of it can cover these higher expenses, this is where you can save.
- 30% is allocated to satisfying desires: wardrobe, outings or vacations. If we can't go on a vacation, it's still good to enjoy small pleasures such as: a theater or movie ticket, books, music albums, etc.
- 20% of our income must be directed towards a savings fund. It is about the savings fund needed to repay debts, savings, unforeseen expenses and pension. The percentage of saving should increase with age: from 5% at 20 – 25 years to 10 – 15% in the most active period of life (30 – 50 years), so that after this age, the saving capacity exceeds 20%.
It is important that this percentage is not exceeded even if there are higher incomes.
The 50/30/20 model was popularized in the United States by Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book, All Your Worth: The Ultimate Lifetime Money Plan.
