We at the Paid in Full Project recommend the 50/20/20/10 budgeting guideline as a basic financial strategy to help get your budgeting on the right track. The 50/20/20/10 rule says that you should spend no more than 50% of your income on essentials or absolute necessities, like housing, food, transportation, etc. You should put no more than 20% toward personal expenses or lifestyle enhanceers like eating out or vacations. Next, at least 20% should go toward savings (like building up an emergency fund or contributing to a retirement account) or paying down debt. Finally, 10% of your pay should be allotted to go church tithes/offerings, charitable organizations, or giving to those in need.
Essentials: 50% of your income
To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage (and, at 50 percent, it is), but once you consider everything that falls into this category it begins to make a bit more sense.
To be clear, your essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include housing, food, transportation costs and utility bills. The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.
Personal: 20% of your income
This category is the one that can make the most difference in your budget- unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life, and what you’re willing to sacrifice. The reason that this category accounts for a larger percentage than your savings is because so many things falls into it.
These personal lifestyle expenses include items such as your cell phone plan, cable bill and trips to the coffee shop. If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for. Other components of this category include gym memberships, weekend trips and dining out with your friends. Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory. Similar to how no more than 50 percent of your income should go toward essential expenses, 20 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.
Savings: 20% of your income
The next step is to dedicate 20 percent of your take-home pay toward savings. This includes savings plans, debt payments and rainy-day funds—things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. That’s a bit of an oversimplification, but hopefully you get the gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.
Think of this as your “get ahead” category. Whereas 50 percent (or less) of your income is the goal for essentials, 20 percent—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker, and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.
The term “retirement” might not carry a sense of urgency when you’re only 24 years old, but it certainly will become more pressing in decades to come. Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.
Giving: 10% of your income
We think it is important to set aside a certain percentage of our income for tithes and offerings for our church. The Bible gives us a guideline of tithing at 10% of our income and we abide by that guideline. We believe that part of the reason that we have been so blessed is because we gave to God and have honored our financial committment to Him. The Bible says in Luke 6:38: "Give, and it will be given to you. Good measure, pressed down, shaken together, running over, will be put into your lap. For with the measure you use it will be measured back to you."
We understand that faith-based giving may not be a priority for everyone. If you are not a member of a church or not affiliated with a relgious organization, while tithing may not be an option we do think it is important to give to charitable causes to help others instead. Not only is it good practice to help others in need, it will end up being a blessing to you in return.
Following the 50/20/20/10 Budgeting Rule is a good start but establishing good habits will last a lifetime. You don’t need a high income to follow the tenets of the 50/20/20/10 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.
Sources: Mint.com