I first broached the topic of finance here on the blog when I told you about my one month spending freeze. The freeze meant all discretionary spending was put on hold for a month. The goal of the spending freeze was to examine wants versus needs, and I think that it was accomplished. Every "want" was interrogated and most were deemed unimportant and promptly forgotten. However, I found it difficult to figure out exactly how much we saved because we purchase almost everything on credit and pay it off at the end of the month, but our credit cards close mid-month (next time, we should freeze opening date to closing date). The main problem, really, was that we weren't able to examine our habits against our budget, because we didn't have one. Nathan and I have been Mint users for a few years, but haven't been actually using it. Enter the 50-30-20 Rule that I first read about on LearnVest and have illustrated below. The 50-30-20 Rule originated in a book by Elizabeth Warren and Amelia Warren Tyagi called All Your Worth: The Ultimate Lifetime Money Plan.
The primary obstacle to maintaining our budget was complicatedness. Some of this was, unfortunately, the fault of Mint itself. After inputting all of your accounts and information, Mint allows you to categorize all of your transactions and set rules, budgets, and goals. But their list of preset categories is extensive and cannot be edited; over time, this led us to introduce more categories and subcategories than we could keep track of. The 50-30-20 Rule took care of this by reducing the number of categories to just three. Here's how it works:
- Up to 50% of your income can go to what are deemed "Essentials" and include food, housing, transportation, and utilities. For us, I only included Metro cards and groceries and not taxi rides or eating out.
- At least 20% should go to "Financial Priorities" which include debt, savings, and retirement.
- The remaining 30% goes into the "Lifestyle" category. This may seem excessive, but when I started categorizing everything, it simplified the process. Instead of deliberating over whether purchases were "essential," I simply put them in "lifestyle". There is, of course, some crossover because I buy things like soap at the health food store, which gets marked as food. I doubt that this affects the percentages much, so it doesn't bother me. But you could always separate those purchases out.
Being that all of our information was already in Mint, we just stuck with it and decided which of their preset categories would be our three. You can add categories of your own, but they get buried in the drop-down menus which makes it slower (and more complicated) to categorize them. Once I re-categorized all of the transactions, the Trends section, when graphed by category, gave me exactly what I wanted: a pie chart of the 50-30-20 Rule. I couldn't believe it was so easy! Now, all we have to do is review the percentages each month, check that things are being categorized correctly, and make spending adjustments.
I've seen this called the 50-30-20 Rule of Thumb, which I like because it implies some flexibility. You choose whether to include eating out in Essentials or Lifestyle. Or maybe you are in a place where more than 20% can go toward retirement. Go for it! Maybe your essentials add up to 53%. You can figure out how to get it to down 50% or just be okay with that. The simplicity of the rule makes those kinds of changes easier to understand and manage. Moneeeeey!
What do you think? Can you learn to love this budget?
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