Nearly 80% of people in the US alone are in some debt. Of these, 68% are in debt because of loans and their credit cards. With those numbers, it’s no wonder that lots of people today are looking for ways to become debt-free. One simple way is the 50-20-30 rule.
What is the 50-20-30 rule?
The 50-20-30 rule is a budgeting system that’s based on the premise that each and every expense you spend every month fall in any one of three categories:
As its name implies, these are the costs that you need to pay on a monthly basis for you and your family to survive. That is housing, transportation, utilities, and groceries. Because they are considered to be essential, this rule says that you should allocate 50% of your total budget to go here.
The second major category is the financial priorities group and makes up 20% of your budget. This is where you list down all of the things that you need to start building a strong and solid financial foundation for you and your family later in the future. That includes savings, investments and any debt repayments you need to settle.
Anything else that doesn’t fit into the first two categories falls under this last category. Lifestyle choices make 30% of your entire budget. That’s pretty much everything from your internet connection to your cell phone bill and even your cup of coffee from your favorite coffee shop.
Applying the 50-20-30 rule
Now that you know what is the 50-20-30 rule, the next (and more important) question is how to implement it if you’re deep in debt? Well, here are some tips to help you out with that.
Make a list of expenses
The first thing you need to do to be able to use the 50-20-30 rule is to list down all of your expenses. This is, no doubt, the toughest and most gut-wrenching part of the whole process because you’ll need to come face to face with all the expenses that you spend on each and every month. But, as they always say, knowledge is power, and this is the right place to start.
Categorize your expenses
Once you got your list written down, the next thing to do is to categorize each and every expense into any of the three categories. Now, for this to work for you, you need, to be honest when you do this. That means that you don’t list that coffee you grab on your way to work as a necessary expense.
Get rid of what you can
The quickest way to become debt-free is to get rid of as many costs as much as possible. Take a quick scan of your list of expenditure and see which ones are those that you can get rid of, or at least abstain from until you become debt-free. For example, if you always eat out while you’re at work, pack your lunch instead.
Follow the order
When you start paying off the things that you need to pay for, begin with your necessary expenses and then work your way down the list. That way, you can breathe a sigh of relief that everything that all the essentials are taken care of.