Do you know where your money goes each month? Do you have a set budget that you routinely stick to? Just the thought of your finances can raise your anxiety but creating and sticking to a budget is essential to a successful financial future, especially if you’re already swimming in debt.
You do not need to be a financial expert to understand how much money you have to spend each month, you simply need to follow the 50-20-30 Rule. Following this rule means that you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.
Calculate Your After-Tax Income
If you are an employee with a steady paycheck, your after-tax income should be easy to figure out if you take a look at old pay stubs. If you are self-employed, your after-tax income equals your gross income minus your business expenses, such as technology, travel expenses, and the amount you set aside for taxes.
Allow 50% For Your Needs
50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work. Your needs should include:
- Basic Utilities
- Minimum Loan Payments
- Child Care or Other Expenses Needed For You to Work
If your absolute essentials spill over the 50% mark, you may need to dip into your “wants” for a while. This means you will have to slightly adjust your spending to make your income work.
Even if the necessities portion falls under the 50% mark, revisiting these fixed expenses is smart. You may be able to find a cheaper cell phone plan, an opportunity to refinance your mortgage, or a cheaper insurance provider.
Leave 30% For Your Wants
Separating your wants from your needs can be a difficult thing to do. However, needs are typically essential for you to live and work, while wants include dinners out, travel, and entertainment.
These items will differ for each person. For example, for health reasons a gym membership may be considered a need for you instead of a want, and the same can be argued for buying more expensive, healthy groceries.
If you are overwhelmed with the amount of money you owe, you may decide to set your wants aside and allocate more of your budget towards debt payments. Budgeting is a tool to help you and relieve stress, not to tie you down and restrict the fun you can have. If you eliminate the entire budget set aside for fun, you are less likely to stick to the budget, so it is important not to eliminate the entire amount allocated to wants every month.
Commit 20% to Your Savings and Debt Repayment
Make sure you take your future into consideration each month by paying off your debt a little at a time. But don’t neglect your savings all together in favor of debt repayment.
If you carry a credit card balance, the minimum payment is considered to be a “need” and counts toward the 50%. Anything extra is an additional debt repayment, which goes toward this 20%, “savings and debt repayment” category.
Do you need help choosing a consumer debt relief option? PCS Debt Relief can help with our debt relief services that are tailored to your needs. We understand the burdens and stress that debt creates, and we’re here to help you every step of the way. Call (636) 209-4481 for a free consultation to achieve financial stability.