How The 50/20/30 Rule Can Help You Get Out Of Debt And Save Money
Rob Berger, founder of The Dough Roller says that the simple 50/20/30 rule brings flexibility as regards your savings , settlement of debts, investments or the three. The 50/20/30 rule can help you get out of debt and save money, and more importantly achieve a budget that is patterned towards meeting all your financial goals. It splits your take-home money into three categories.
In an Interview with NBC, Berger says, “Fifty percent is for needs, thirty percent is for wants, twenty percent is for savings.” Here is how the breakdown is given;
50% goes into food, payment of debt, rent/mortgage, bills, and other necessities.
30% goes into entertainment, vacations, dining, etc.
20% goes into your financial goals such as investments, savings, etc.
But before launching out quickly, Berger advised that it is important to be realistic about how much you can save. Now, someone who has a huge debt and high expenses may need to consider a workable rule to get them to pay off their debts and increase their savings. They can consider 80-10-10 till they have significantly cut down on their debts and increased their savings.
And instead of nagging on your inability to achieve saving 20% of your take-home, Berger suggests that you re-evaluate how you spend. He says, “Rather than immediately say, ‘Oh, this won’t work, I can’t save 20 percent — which I understand, I’ve been there, most people have been there — spend some time thinking ‘Well, wait a minute, if I had to make this work, what choices could I make to make it work?’ Think through all the things you absolutely must have.”
He advised that while achieving your financial goals will not be easy, it is very important to be focused on what you totally have to have. He says that this would mean shrinking that 30% and getting rid of spendings you can honestly do without. “If you find yourself in a difficult financial situation, you’ve got to make those tough decisions.” he says.
What Should You Cut To Save More Money?
Berger says it is possible to be spending too much in such a way that you didn’t realize it. He advises that you should first take a look at your top expenses. These should include your rents, car payments, mortgage, and so on. Frankly consider ways you can cut down on the expenses. For instance, you might want to consider moving to a less expensive location, or get a used car instead of being knocked off by the cost of acquiring a new one.
And if you are having a hard time cutting down on your major expenses, then consider cutting down on the smaller ones.
Examine your 50% bucket expenses and frankly ask yourself if you really need any of those items, or can probably reduce the cash that goes in there.
“If you haven’t checked car insurance rates in three years [for example] maybe you should shop around for better car insurance,” says Berger.
Take a close look at your 30% bucket list to discover things you might have been wasting money on the most. Berger advices that one should consider a mini-budget in areas where it seem that you may be spending too much. This mini-budget should be targeted at controlling your spendings and also help you make more savings. For instance, if it seems that you do a lot of expenses on eating out, you should create a dining budget which would be channeled at meeting your savings goals.
So, it is not necessary that you have to be taking a record of every dime if you do not feel you have the time. Itemize the categories you think should be attended to, and provide a budget which you should not exceed for those categories.
We have a list of the best budget tools which you can consider to manage your spending with your partner.
Figure Out Your Savings Goals
For the 20% bucket for savings, your personal and financial goals would determine how you choose to manage it.
Berger suggests that people who still have very little saved should consider using the 20% bucket to build an emergency savings fund, till you are able to attain a comfortable amount. A mutual fund or an investment like an IRA is something you can make a contribution to.
If you have debt you aim at paying off, you should begin to designate a percentage of your 20% bucket to make an increased payment on your debts till they are cleared. And if debt isn’t in the picture, Berger suggests that you should contribute a portion or perhaps the total 20% into a retirement fund.
However, he warns that making 20% investment is not going to be enough for people considering retiring early. He says, “I would say you’re probably looking at at least 30 percent or higher and, again, it depends on how quickly you want to retire.”
Live Below Your Earnings And Control Your Wants
One huge challenge that people who make use of the 50/20/30 rule face is that they find it hard to live below their means and control their wants. Berger says that this may actually be tough for young professionals who are getting employed for the very first time. He says, “You’re getting the job with a little bit of money and you want as nice a car as you can afford, and you want as nice an apartment as you can afford, and then you sit back and you say ‘Oh, I can’t save 20 percent, that’s impossible.’ And it’s not impossible, it’s just that choices have been made that put you in a box that makes it really difficult.”
Berger is very experienced with the way the 50/20/30 rule works. He graduated in the 1990s from a law school and found himself a huge debt. He had tens of thousands of dollars to settle. Aside this, he also had to struggle around with car payments, mortgage, and several other monthly bills hanging on his neck.
Through well planned budgeting, Berger revealed that he cleared off his debts in 2016 and have continued to live with his wife below his means after sorting loans.
“We live in the same house that we lived in — we bought it 14 years ago, it’s the same house we lived in when we made a lot less money,” Berger says.
He advised that anyone willing to be debt free must promise themselves never to fall into more debt. Berger says, “And to me the biggest struggle is just making that decision not to get into any more debt for any reason and sticking to it.”