Most budgeting systems are time consuming and complex. The beauty of the rule-of-thumb budget is the speed and simplicity of it. All you need to know is your after-tax income. Once you have determined your after-tax income, you simply allocate it as follows:
- 50% towards your necessities
- 30% towards your wants
- 20% towards your financial goals
Next is to define the categories: Necessities, Wants, and Financial Goals.
Necessities are what you require to live and work. This category includes: housing, food, utilities, basic clothing, transportation, and debt payments.
Wants are what you desire after your needs are met. This category includes: dining out, designer clothing, accessories, subscriptions, and upgrades to your necessities.
Financial Goals are what you hope to achieve in the future. This category includes saving for retirement, a new car, paying off debt early, and for a major life event like a wedding or vacation.
One thing to keep in mind is that these categories are not mutually exclusive, meaning that food does go under necessities, but dining out at a nice restaurant would go under wants. Both are technically food expenses, but one is clearly more than what you need.
Also, these numbers are not rigid requirements. Your allocation may look more like 40/30/30 or 50/20/30. The breakdown is meant to be a guide to prevent overspending. Also, you may find your allocation changing over time, such as when you pay off a debt, get a raise, or move to a new location.
Even if you do not use this system for budgeting, it is an excellent way to determine what you are able to spend on rent/house payments, a new car, or that fancy new computer. Also, this can be used to stress test your current budget to see if you may be spending too much on your necessities or wants.
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