Personal Finance: Budgeting (the Rule of Thumb)
You don’t have to see the whole staircase. Just take the first step.
– Martin Luther King, Jr.
As with most things in life, all you have to do is start. The same goes for budgeting. Even in the absence of financial goals or elaborate plans, you can still make considerable economic achievements through budgeting. All you have to do is apply one rule of thumb or another.
A rule of thumb is a guide that allows you to judge or maneuver a situation based on experience. Rules of thumb do not offer exact solutions but can help you navigate new or complex problems. A financial rule of thumb allows beginners and experienced financial experts to achieve their money goals. As part of our series on personal finance for beginners, we highlight three rules of thumb on budgeting:
Benefits of budgeting
According to Spendmenot statistics, only 32% of US families maintain a household budget. So why should you join this number? A budget is a financial plan that helps you allocate funds to different categories of your life. You get to decide how much you spend, save or invest based on your take-home income. Your take-home income is the amount left after the payment of taxes and medical insurance.
Budgeting allows you to:
Highlight horrible spending habits.
Prepare for emergencies.
Spend what you can afford.
Stay focused on your personal finance goals.
Budgeting: the rule of thumb
As explained earlier, there is more than one rule of thumb when it comes to budgeting. These rules are not set on stone. In fact, they are used as guidelines and can be changed to fit your circumstances and income.
Rule 1: 50/30/20
This rule of thumb aims to make budgetary allocations easier. The book Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and her daughter Amelia Warren introduced the 50/30/20 rule.
The book proposed that take-home income should be divided into three segments:
50% for necessities: Includes electric bills, rent, groceries, and any other items or services you need daily.
30% for wants: Includes eating out or expensive trips. Anything you can do without but which makes life more enjoyable.
20% for savings. About "58% of Americans have less than $1,000 saved" - shares Spendmenot. This portion of your income could be invested or put into a retirement fund. Consider putting it in a 401K or merely adding it to your emergency fund.
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Rule 2: 80/20
This rule of thumb is a derivative of the 50/30/20 rule. Just like its predecessor, it pushes you to pay yourself first. This rule proposes that:
80% of your take-home income should cover your living expenses.
20% goes into your savings or investment accounts.
This rule is less complicated and easier to use. Plus, you do not have to feel guilty about including your wants; Roping in with all your other expenses.
To ensure you keep up with your savings, consider initiating an automatic withdrawal from your checking account. It can take place a day or two after you receive your salary. Additionally, you can use apps to make money. Honeygain is a great side hustle up that can help you build your savings over time.
Rule 3: 70/20/10
This rule of thumb is different from the rest. Unlike the previous versions, it provides for the repayment of debt. If you have any student loans, credit card debts, or mortgages to pay off, this is the best rule for you.
Your income should be as follows:
70% catered to your daily expenses.
20% allocated to your savings and investments.
10% goes directly to debt repayments.
The reason why debt repayment is essential in this rule is:
Accumulated debt increases the amount of interest you pay in the long run.
Missing debt repayments lower your credit score.
Unchecked debt can plunge you into the debt cycle, making it difficult to attain financial freedom.
Also, because of your expenses budget cut, you tend to prioritize your needs over your wants.
How do you enhance your budgeting skills?
Depending on which rule of thumb you decide to use, below are a few tips to help you out:
Have a clear idea of what your monthly income is. Include all the revenue from your job as well as any smart passive income from Honeygain.
Allocate a limit for each category. Put cash aside for your needs, wants, and financial goals without leaving out any sort.
Stick to your budget. Track your spending to ensure you are staying within budget. If not, include measures to help you save money and manage your expenses.
Using a rule of thumb to improve your financial habits can be helpful. However, each of the practices shared today may have a few shortcomings:
20% savings may not be enough depending on your financial goals. If you plan to achieve a high target over a short period, you need to adjust your saving percentages accordingly. You can also make extra money and send it directly into your savings account. An easy way to do this is by downloading the Honeygain app and earning free money.
Grey areas. Some items tend to fall under two categories. Food is a need. However, expensive food could be considered a want.
If your income is low, it may just be enough to cover your expenses. If this case applies to you, then consider becoming a Honeygainer and getting smart passive income effortlessly. Remember, the higher your income, the easier it is to budget and save. Honeygain allows you to make free money just by sharing your internet connection. It is a safe and secure way to increase your take-home income and meet your goals.
It still requires you to track your spending. Just because you allocate a budget to each category, you still need to track your spending to keep your expenses on track.
Rule of thumb in budgeting is an easy way to make smart personal finance decisions. However, the key to financial freedom lies in generating enough income to cater to your necessities, wants, savings and debts. Achieve this by earning smart passive income with the Honeygain app. (TIP: use 💸 'sweetmoney' 💸 coupon to get $5 into your new Honeygain account).