Follow this simple rule to financial independence

You've made the decision to get on top of your finances and the first thing everyone tells you is that you need a budget. But you're like most people and you find budgets a drag. Don't worry, you're not alone and there is a solution.

The problems I hear most recounted by people when faced with the need to budget is there's a lot of micro-accounting and budgets focus on the negative: you have to give up things to make it work. Well, experience tells me it will be easier if you can do away with the record-keeping and reprogram your brain to see positives.

So here's the good news: You don’t need complicated spreadsheets with countless spending categories, and you don’t need to be a financial expert to understand how much money you can spend. You simply need to follow the 50-20-30 rule.

The 50-20-30 rule is perfect for people who freak out at the thought of budgeting. You can even keep your morning Zarraffa's drive-through if you want.

This Rule Method helps you build a budget by using three spending categories:

  • 50 percent of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work and your minimum payments for debts like credit cards.

  • 20 percent of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (extra payments to credit card to get rid of them).

  • 30 percent of your income is for the fun bit that can be used for flexible spending. This is everything you buy that you want to but don’t necessarily need to (like money spent on movies and travel).

To get started

To start the 50-20-30 rule figure out what’s currently happening with your finances. Look at how much you bring home each week or month, this is what will determine what your 50-20-30 splits will look like. Then review your spending to determine how much essential items, mortgage or rent etc, are costing you.

You should keep in mind that the limits for Essential Items and Flexible Items are the maximums you should spend. If you manage to keep under these limits you should devote that surplus to your Financial Goals. On the other hand, If things like your essential monthly bills are higher than 50 percent of your monthly income, you really need to make some adjustments. Find other ways to cut your monthly expenses by making your home more energy efficient and shop smarter for groceries.

The goal for budgeting is to get out of debt, and increase your savings and investments. Of course, you want to get to a point where you can buy that home you've been dreaming about, and have the income you need to take those amazing holidays. To do that, you need to zero in on eliminating unproductive debt and growing your personal wealth.

Is budgeting fun? That will depend on your mindset but but with the 50-20-30 rule, at least it’s not torture. It’s a way to prioritise and weed out those expenditures you can live without. It’s not about living like a hermit or denying yourself any fun.

A new budgeting method can make a world of difference, but if you’ve been struggling to get your finances back on track for a while it may be time to seek expert advice - call me on 0402 684 199


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