Mo Money's Building Wealth Blog

I know that I need to budget my money better, but where do I start?

Well, a good place to start might be to consider the 50\30\20 rule of budgeting. Essentially, this guideline recommends that you allocate a percentage of your take-home pay to 3 distinct categories:

· 50% to Needs

· 30% to Wants

· 20% to Savings

Note: This is only a suggestion or guideline of where to begin. You do you. You do what’s comfortable for you. And as they say, YMMV (your mileage may vary).

So let’s break the categories down as I define them –

Needs would be considered things like housing (rent\mortgage), groceries, utilities, transportation (car\bus\train), insurance, medical, debt payments (loans\credit cards). Needs are considered the must have things that you need to live in this world. They are the necessities of life. That being said there is a lot of latitude that might come from the style of living that you maintain. If you feel that you “need” to drive a Mercedes Benz, shop at Whole Foods, and live in a Penthouse then you better make sure that your income supports this. If not, then you are likely living beyond your budget and might want to look into dialing back on your lifestyle.

Wants would be the fun things in life and the real reason why most of us go to work each day. These are things like entertainment (dining out\movies\plays), traveling\vacationing, spa and beauty treatments, gym memberships, daily coffee fixes, cocktails with friends, a luxurious home or car. These things can easily add up so it’s best to keep an eye on them and stick to your budget.

Savings allocation, though probably the smallest percentage of your take-home pay ranks close to the Needs category as far as importance. In the Savings category you will find things like an emergency fund (medical bills\job loss\home and auto repairs), investments, retirement, new home or auto, continued education, weddings, babies. And the amount you save also depends on where you are in life. Certainly, the savings requirements are different between someone in their twenties versus someone nearing retirement.

As I’ve stated, these are all general guidelines. What gets tricky is that the Savings category can possibly be used to fund some Needs (e.g. a new car) and some Wants (e.g. a nicer home). You want to be careful of that as you don’t necessarily want to rob from your emergency or retirement savings in the process. I guess that you can say it’s a balance and you’ll want to find the right balance for you.