Budgeting for retirement can appear to be a daunting and complex task at first glance. However, the simple 50/20/30 budgeting rule can ease the burden and bring you peace of mind. The rule provides a balanced budget that can be adjusted to fit your personal financial goals.
The 50/20/30 rule divides your after-tax, take-home pay into three separate buckets:
- 50% of your income goes to necessities/essentials (housing, utilities, minimum debt payments)
- 20% of your income goes to savings/financial priorities (long-term saving, extra debt payments)
- 30% of your income goes to lifestyle spending (entertainment, hobbies, and vacations)
Dividing income into three separate buckets allows for simple and effective budget management.
- The necessities bucket contains fixed costs that you make on a monthly basis. These required payments carry consequences if they’re not made and must be adequately budgeted for.
- The savings bucket consists of long-term saving goals. Consistent savings will help you address unexpected emergency spending and prepare for retirement.
- The lifestyle bucket budgets for non-essential spending that contributes to leisure and entertainment. Think of lifestyle spending as the rest of your income after contributing to the other two buckets. This ensures that your fixed costs and financial priorities are addressed first.
Practicing the Rule
This approach provides a holistic understanding of your finances and categorizes spending. Trackable spending allows you to identify opportunities to reduce expenses and increase savings. Certain bills and expenditures such as cable, satellite radio and eating out can be reduced or eliminated. The earlier and more you budget for saving, the more you’ll benefit in the long run.
Peace of Mind
Making the 50/20/30 rule a habit will reduce the burden and complexity of the budgeting process. Dividing your income into three distinct buckets will provide an understanding of what and where you should spend your income on. With trackable spending, costs are controlled, allowing for adequate savings. Practicing this habit of budgeting will allow you to prepare for a predictable and sustainable financial future.