The moment you start spending money without a clear plan, you set yourself up for failure.
When Elizabeth Warren, the well-known U.S. senator who was previously a law professor at Harvard, published her popular book When Elizabeth Warren, the well-known U.S. senator who was previously a law professor at Harvard, published her popular book All Your Worth: The Ultimate Lifetime Money Plan more than one and a half decades ago, a groundbreaking money management strategy was born.
The 50/30/20 budgeting rule, as it’s commonly known, has helped thousands of women- and people in general- adopt better personal finance management.
You can join millions of smart women who have mastered the art of using their money wisely with the 50/30/20 budgeting rule. This basic rule dictates how to divide your net income, that is, the amount you remain with after deducting taxes appropriately.
From this, you set aside:
50% to Your Needs
Your needs, in this case, are your essential expenses. That is everything you have to pay for at the end of every month.
These expenses often include mortgage or monthly rent for your home, car insurance payments, healthcare, any loan repayments, household bills, groceries, and so on.
So, you dedicate half their income to meeting all these obligations.
So, what happens when your needs are more than 50% of what you’re earning?
Most personal finance gurus would suggest you cut down on your expenses.
For instance, moving to a cheaper house or cutting down on your household bills.
However, this option is somewhat tricky since everything on your needs list is essential. Also, I am not a fan of this approach as I think this is not healthy for your mindset.
I mean, I am definitely all-in about cutting down on impulsive purchases, but I am not those who would think about not doing my nails and hairs and lashes and facials because girls, I need those things to make myself feel like a queen, so I can go out and kick asses.
In my world, they are my essentials. So instead of being too caught up with cutting your expenses and skipping that latte that brightens your day, I urge you to set your mind to think about how you can increase your income or income streams.
Well, the easiest way to increase your cash flow is to build new income streams.
Now, I can hear you say no other advice about being a freelancer and starting your blog, no other advice about putting in my time and energy 24/7 for money when I am already stretched too thin.
Well, I hear you, and we are exactly on the same page! When I talk about additional income streams, I want you to focus on those that generate “Passive Income”.
Although they still require your upfront hard work, you can sit back and let that money enter your bank account once the job is done.
My favourite passive income streams are my stock investments and sales of digital products, and of course my YouTube channel and maybe this Medium page soon!
While building your other income streams, you may also consider taking some money from your wants’ percentage if your needs are more than 50% of what you’re earning.
30% to Your Personal Development
The original rule says that you should allocate 30% of your budget to your Wants, but as a smart woman, I want you to allocate this 30% to your personal development and things or rituals that would help you feel like a Queen or a Boss.
The key here is that your Personal Development should be of higher priority than your wants. From that 30%, I suggest you allocate 20% to your personal development and 10% to your wants.
I also want to remind you that only by investing in yourself you can increase your income-earning potential.
I am a big fan of coaching, and I think it’s worth it that by spending some money, you buy back yourself the non-renewable resource – time and get yourself from point A to point B so much quicker.
Also, the truth is I see this 20% for my investment as part of my “Needs” and “Essentials” because I genuinely believe that only by investing in myself I can earn more and make a more significant impact.
After you have invested in yourself, you should treat yourself since you have been doing great budgeting.
Your wants are anything you want to buy but can do without. It could be a new pair of heels you’ve been eyeing for some time, dinner with friends at a fancy restaurant, a vacation you’ve been wanting to take, Netflix, a phone or car upgrade, and so on.
For me, it’s those fancy candles I like to use at home to feel extravagant.
So what should you do if your wants exceed 30%?
First of all, you should go back to the exercise on increasing your income streams.
Instead of thinking about how and where to cut down your expenses, consider covering that expense with an additional income.
While you are coming up with your idea, you should forgo or postpone some things until you have to implement your strategy or until the next paycheck comes in.
20% To Your Savings and Investments
With your needs and personal growth is taken care of, you can now dedicate the remaining 20% towards achieving your financial goals.
This part is perhaps the most important because it’s how you can grow your wealth in the long term.
So how do smart women spend their 20%?
They first build a solid emergency fund.
An emergency fund safeguards you against unexpected financial events, such as layoffs, unpaid leave, or suspension.
You want to save about 3-6 months of your total expenses into an emergency account before you can think about investing.
Now, when it comes to investing wisely, diversification is critical.
It not only shelters you from a poor performance from one investment and can also see you make better returns than if you put all your eggs in one basket.
The smartest thing is to spread your money between your IRA, high-yield savings, and mutual funds or ETFs.
50/30/20 Budgeting Rule Application to Business
Now, we know how the 50/30/20 rule can help you plan your monthly income. But I know some of you here are bosses.
So how can an entrepreneur also use this rule to budget once their business becomes profitable?
In this case, your 50% should also include your business bills such as salaries for your employees, rent for the office space, internet, and other utilities.
Your 30% should still be allocated for your personal development goals and wants, while your 20% should be channelled towards meeting your personal financial goals and your business development goals, such as buying new software/equipment and saving towards expansion, and so on.
The 50/30/20 rule is a pretty simple strategy that you can implement today to make smarter decisions about your finances. Lots of smart women are doing it, and so can you.