Prioritize Your Finances: A Guide to Breaking Down Your Budget
Friday, November 22, 2019, 6:00 AM | Leave Comment
The finance experts suggest that dividing up your income and savings between needs, wants, and debt repayment is the wisest course moving forward.
This strategy can be short handed as the 50/30/20 rule: perhaps 50 percent of your after-tax income should go towards necessities like rent and food, no greater than 30 percent of your after-tax money should go towards wants and non-essentials, and the remaining 20 percent should go towards various forms of savings and debt repayment (e.g., college loan repayment).
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Essential Resources
Fifty percent of your income and after-tax money is really a lot of resources being shored up on a monthly basis. Accordingly, that money will go towards a number of different uses, including but not limited to the following: groceries, transportation, housing, utilities, insurance, loan and mortgage payments, and child care expenses (if you have a child or are planning on having a child soon).
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Troubleshooting Problems
Should your “essentials” items collectively overshoot the target, then you have one of two strategies. You can either economize what you consider essential or, secondly, dip into the “wants” fund (30 percent part of the 50/30/20 rule) in order to make up the difference. (This whole breakdown assumes that you can’t instantly “grow the size of the pie” and that your income is static.) You might find, though, that there are ways to refinance your college debt or achieve better financing options on a home mortgage. A local company like CoMax Properties might be able to help with that.
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Inessential Wants
Separating out needs from wants can be difficult, and doing so effectively while keeping your expenses separate in your budget can be one of the hardest challenges that those attempting to save up money will have to overcome. For instance, would organic groceries be considered a want or a need? The answer probably depends on how much you prioritize health. The same could be said for a bigger apartment or a gym membership. The first step, therefore, will be deciding which expenses are needs and which are truly wants. Sometimes, putting a few wants on hold can make sense, especially if you’re trying to save up money to front the down payment on your dream home!
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Debt Repayment and Savings
About one-fifth of your income should be put towards repaying your debt and shoring up more funds in your savings account. Both paying down your debt and saving for the future will improve your long-term financial health.
