The Budget Formula Created By A Harvard Expert You Need Every Month
Nobody likes the monthly budget headache that rolls around just before payday!
Plain and simple, budgeting can be a mission.
And just because you’re aware of how much you spend on certain things, does that mean you have the right mix of spending and saving you ideally should have?
Which is why when I bumped into Harvard bankruptcy expert Elizabeth Warren’s 50/30/20 rule, I just HAD to show it to you.
With it, your budgeting headache will disappear faster than it’d take you to reach for that monthly panado.
It’s a simple four step process, and it’s easier to use than you could possibly imagine.
Let’s get to it…
REVEALED: The 50/30/20 Rule of Thumb
Elizabeth Warren, named by TIME Magazine as one of the 100 Most Influential People in the World, coined the rule in her book “The Ultimate Lifetime Money Plan”.
And her 50/30/20 plan is broken down into four steps.
They’re fairly simple to follow, and even easier to implement.
Let’s explore them.
Step #1: Calculate Your After-Tax Income
This is pretty straight forward.
Your after-tax income is the money you take home after taxes and deductions.
These can include PAYE, (Pay-As-You-Earn), UIF, employer contributions, and a number of things.
If you’re an employee with a steady salary, your after-tax income is pretty easy to figure out.
Just take a look at your salary slip and you should be able to find it.
Alternatively, whatever the amount your employer pops in your account every month should be the same amount.
Step #2: Limit Your “Needs” To 50%
At this point you want to review your budget (and what you have left over after taxes).
You need to separate what you spend on “needs”.
And no, chocolate chip cookies are not a need, no matter what you want to believe!
Things like car & house insurance, groceries, your bond, school fees etc.
According to the 50/30/20 rule, what you spend on these “needs” should be no more than 50% of your after-tax pay.
Pretty straight forward right?
Well, the slightly more complicated issue comes in between what a need and a want really is.
That’s the million rand question right there.
I like to look at it like this…
Any payment that you can forgo whilst only incurring a minor inconvenience (like your DStv bill, that new golf club, back to school supplies) is a want.
Any payment that would seriously impact your life if it weren’t paid, like the electricity bill or prescription meds, is a need.
However, if there are minimum payments that you simply can’t forgo, then they need to be considered as “needs”.
Well, the last thing you want is to damage your credit score if you don’t pay them!
Step #3: Limit Your “Wants” To 30%
Sounds awesome right?
30% can go towards stuff that I want?
Holidays, golf trips, new clothes, fancy dinners!
Hello good life.
Not so fast.
Remember the difference between wants and needs outlined in step 2?
Sometimes needs mysteriously “upgrade” into wants.
So let’s use groceries as an example.
Bread is a need.
No arguments there.
But choc chip cookies?
I think you and I both know that’s a want.
Despite both being lumped into groceries, one is clearly at your discretion.
You might also find that you spend more on wants than you think!
Certain outfits can be classified as a need.
But that fancy jacket or snazzy watch?
Those are wants.
So you need to be strict between the two and not cheat when you put together steps 2 and 3.
Step #4: Spend at Least 20% On Savings and Debt Repayments
The final 20% of your after-tax money should go to paying debts and saving money in your emergency fund.
For example, if you have a minimum credit card amount outstanding, as outlined above, that falls under the “need” bracket.
So it counts toward the 50%.
If you pay anything over that it qualifies towards this 20% in step 4.
The same goes for any additional payments on car loans, bonds and even retail accounts (like Woolworths, Truworths etc).
The minimum payment is a "need" and any extra payments count toward your "savings and debt repayment".
Budget Like A Pro With This Simple Formula
Budgeting doesn’t have to be such a pain.
In the time it’s taken you to read this article you could’ve already sorted your budget and moved onto better things.
Seriously, that’s all the time it takes!
All you need to do is follow this simple process and you’ll banish that monthly money headache in four easy steps.
Simply calculate your after-tax income.
Work out what your “needs” are and limit them to 50% of the after-tax income.
Once you’ve done that, calculate your “wants” and limit those to 30% of the after-tax income.
Lastly, spend your last 20% on savings and debt repayments.
Follow these four steps every month and you’ll be budgeting like a pro in next to no time!
In fact, we've made it even easier for you.
We've put together a "50/30/20 Cheat Sheet" so you can track your finances without the headache or hassle.
Until next time, here’s to good money management.
The Money Lab