The Best Way to Allocate Earnings

Allocating your monthly earnings can be ‘taxing’ if not done properly, no pun intended. Many people have their own ways and strategies to make it work but according to experts, one of the most basic and most effective way of allocation is using the 50/30/20 rule.

The 50/30/20 rule is a popular budgeting scheme. It is one of the most popular because it is easy to use and easy to understand. It simply equates your earnings to 100%. From there you partition it to 50%, 30%, and 20%.

50% Fixed Expenses

The 50% or half your total earning automatically go to your monthly expenses. This means that it is where you will get the payment for your bills (electric bills, water bills, phone bills, etc.), housing payments (rent, mortgage, or association dues, etc.), and most importantly, the food you eat everyday.

Fixed expenses are for your responsibilities and things that are necessary for you to live comfortably. Pay on time to avoid additional expenses from penalties. If you can, automate bills payment. Some banks offer this feature. Moreover, as much as possible, make your own food and keep it budgeted.

30% Discretionary Expenditures

Some people include food in this partition just because it can become a discretionary expenditure what with the unexpected dinners, lunch outs, and snacking. However, if you have a fixed budget for food, you can go ahead and squeeze it in the fixed expenses.

In the traditional sense, however, discretionary expenditures include your other expenses that may or may not come up every month. These include clothes, entertainment such as movies and sports, travelling, gadgets, accessories, and other wants.

20% Savings

The remaining 20% should be allocated strictly to savings. Experts believe that an emergency fund must be set up first. A good rule of thumb is to save three months worth of your monthly expenses.

Once you’ve secured an emergency fund, then you can allocate your savings to an investment. You can choose to simply let it sit in a bank account or you can go ahead and research ways to utilize it. It can go to a life insurance, a mutual fund, a retirement savings, or another savings plan. All of these will vary depending on your needs and financial goals. You can use it to buy a future expense such as a house, a car, or tuition for your children.

In essence, saving up is necessary for you to have a financially secure life free from worries. As much as possible, be responsible with your money.

There are other saving schemes out there, take time to find one that suits for you.