Use the 50/30/20 Formula to balance your financial life. The 50/30/20 is the ratio of your Essential (Must-Have) expenses, your Discretionary (Wants) expenses and your Savings as compared to your actual Net Income. This is the ratio that most experts consider the Ideal Goal – a lifestyle free from money pressures and worries.
So, what goes into which? First off, it is important to remember that your total for Essentials is the biggest factor in determining whether you’ll be able to live the worry-free lifestyle. Control this and you have solved your situation 80% of the way.
Essentials are your expenses that you can’t do without – mortgage or rent payment, utilities (gas, water, electricity), basis phone, home insurance, transportation expenses (car payments, insurance, gas, etc.), food, medial care, personal insurance and legal or contractual obligations.
Savings include the ‘traditional’ (savings account, and investments – RRSPs, TFSAs, etc.) and debt payments and for good stewardship, a charitable giving amount. Only debt payments (over and above the regular monthly required) is classified here and considered under savings. Since getting out of debt is a vital goal in a stress free financial life, any debt amount eliminated is considered savings (if you carry a balance in a credit card for example).
Your Discretionary (Wants) expenses is the easiest to determine. These are the other expenses you can’t classify into either must-haves or savings. These are your ‘fun’ money, expenses that make life interesting and enjoyable. We don’t splurge but we don’t limit ourselves either.
A worry-free financial lifestyle entails a well-balanced allocation of income. So here’s the thing – if you want to start off in this path, take an inventory of how you spend your income every month and determine your actual score on each category. Is it out of whack or does it come within or close to the 50-30-20 ratio? Once you know this, you’ll know which specific area(s) to work on.
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