To begin, you can apply our 50-30-20 budgeting rule inspired by Elizabeth Warren’s very own budgeting rule as a general guide on how to spend, save and invest efficiently. There have been different variations of this rule such as the 70-20-10 rule and the 60-20-10-10 rule. However, the main takeaway for each of these rules are the same: you must portion your take-home salary wisely.
For The Joyful Investors’ version of the 50-30-20 rule, the 50% should be allocated towards needs and wants expenses. This is the percentage of money you spend on expenditures such as food, car payments, mortgage and entertainment. You can also further split this 50% into discretionary and non-discretionary expenses. Purchase of products you desire also falls into the discretionary expenses category.
The 30% is allocated towards investment. This is important as it allows your money to grow to a larger sum, boosting your income to fund your lifestyle and enhance your quality of life.
Lastly, 20% will be allocated towards savings. This will be used as your ‘emergency funds.’ In situations like when COVID-19 hit, it is pertinent that you have at least 6-months worth of expenses in the form of liquid cash. This can be used to maintain expenses during an emergency such as unemployment or medical accidents. As a general guide, it is definitely important for people to set aside sufficient funds as emergency funds for the rainy days.
It is up to your preference if you would like to continue with this rule after saving up enough for your emergency funds. You may allocate a bigger percentage for any of the categories based on your comfort level. Nevertheless, through the use of this rule, you can easily portion your money and budget at the same time without the stress of counting every dollar that you spend.
The 50-30-20 rule can also be adapted flexibly to suit your current stage of life and income level. For instance, if you are in the midst of renovating your new house, then perhaps you will have to increase the proportion of spendings while reducing the proportion on investments or savings. Realistically speaking, it may not be that easy for someone earning an income in the lower income bracket to just spend only 50% of his monthly salary. Hence, the 50-30-20 rule should be modified accordingly.