One simple and popular approach to managing your finances is the 50/30/20 budgeting method, which involves allocating your after-tax income into three broad categories: Needs, wants, and savings.
How to use the 50/30/20 method?
First of all, calculate how much money you take home after taxes and other deductions each month. This is your starting point for budgeting.
According to the 50/30/20 rule, you should allocate:
- 50% to Needs: This category covers your essential expenses such as housing, utilities, groceries, transportation and insurance. It should ideally consume no more than 50% of your income. Otherwise, consider ways to cut back, such as downsizing your living space or unsubscribing unnecessary services.
- 30% to Wants: This category includes everything from discretionary shopping, dining out, entertainment, vacations and hobbies. You should set aside 30% of your income to fulfill these wants. While it's important to enjoy life, be mindful not to overspend in this category.
- 20% to Savings and Debt Repayment: 20% of your income should go towards long-term goals such as retirement, emergency funds, investments and debt repayment. Aim to build an emergency fund of 3-6 months' worth of living expenses before focusing on other savings goals.
Track and reassess your spending
Don’t forget to regularly monitor your expenses to ensure you're staying within each category's allocated percentage. You can use budgeting tools, apps or spreadsheets to track your spending.
Because life circumstances and financial goals may change over time, periodically review and reassess your budget. Adjustments may be inevitable along the way; what’s more important is to maintain discipline and consistency in managing your finances.