The Easiest Rule To Manage Your Money

I bet that you are unaware of the fact that about 35% of individuals have no retirement savings whatsoever. 

If you happen to fall into that category, don't fret about it because you're not alone. 

However, there is a rather significant issue, as Social Security is projected to run out of funds even earlier than originally anticipated. 

If you don't want to find yourself struggling financially at the age of 60, only able to afford a regular hamburger instead of a cheeseburger, then you better pay close attention. 

The truth about saving for financial independence is that it involves a great deal of guesswork. 

Although there are guidelines, such as the four percent rule, accurately predicting your required savings amount is challenging. 

That’s because, unless you possess a crystal ball, you cannot anticipate the future. 

You can't foresee what your investment returns will be, how severe inflation will become, or even what your future spending habits will be, and all of these variables and more are critical to accurately estimating your financial freedom number.

The Simple Rule

However, there is a beginner's approach that you can start using right now, as soon as you finish reading this article. 

When we hear the term "money management," we often envision elaborate and overwhelming Excel spreadsheets filled with numbers, pie charts, bar graphs, and a slew of confusing data. 

However, it doesn't have to be this way. 

A more straightforward and effective method gaining popularity is the 50/30/20 rule. 

The 50/30/20 rule has gained popularity due to its straightforward approach, which makes it similar to the basics of budgeting or the "ABCs". 

However, like with anything, there may be some surprising imperfections that you're not aware of.

How It Works

But first, let's break down the 50/30/20 rule. 

Step One:

To start, you'll need to take your after-tax income, or take-home pay, and let's say it's $1,000. 

We'll then split it into three separate buckets: your needs, your wants, and your financial goals. 

Fifty percent, or $500, of it goes into your needs bucket. 

Thirty percent, or $300, goes into your wants bucket, and twenty percent, or $200, goes into your financial goals bucket. 

Step Two:

The needs bucket is basically everything that you need to survive. 

Not like in "Squid Game" surviving, but more like the basics: food, housing, electricity, transportation, and the minimum payment required for your debt. 

Now, if you're looking over your expenses right now and pounding on the table because you're already over the 50% threshold, don't panic because I've got you covered later on. 

Step Three: 

For the wants bucket, you might think that 30% is a lot of money. 

However, we're not talking about getting a new iPhone every year once it's released or treating yourself to a triple cheeseburger at McDonald's. 

That, my friends, is only for special occasions. 

When I say "want," I'm talking about things that you can potentially live without, but your life would be just a bit harder without them. 

Examples include super-fast internet, Netflix, traveling, iced coffee, and dinners. 

Sometimes, it may be hard to distinguish between needs and wants. 

But the rule of thumb is to ask yourself if you can live without it. 

If you can, then it's most likely a want. 

And if you're not entirely sure, comment below on what you had in mind, and I'll let you know. 

Step Four: 

The financial goals bucket is a broad term that encompasses emergency funds, investing, paying off extra debt, and more. 

Now, let's pause here and rewind. 

Remember when I said that minimum debt payments go into needs? 

That's true because minimum payments are kind of mandatory, and we don't want to get penalized for not paying them off. 

However, any extra payments on top of the mortgage or the credit card to clear your debt faster go into this bucket.

The Downsides

The 50/30/20 rule is a fantastic way to manage your money, especially for people who are just starting out, because of how simple it is. 

But if you're worried because you don't have enough money to allocate into these specific three categories, don't worry. 

That's what we're trying to fix. 

Figure out where your money is going every month and adjust your expenses accordingly. 

However, even then, this rule might not work for you because it does have two serious flaws that might actually harm you financially. 

There are two significant downsides to this approach that can be just as detrimental as any other financial strategy. 

The first flaw arises when you are making a boatload of money. Right? 

First of all, problems. 

And if you make a lot of money, it may not make sense for you to follow this rule because it might not be necessary for you to allocate such a significant amount of money to your needs. 

For example, if you earn $200,000 annually after taxes, do you really need to spend $100,000 each year on your needs? 

It's highly unlikely. 

If you try to stick to this framework, you may end up spending more than you need to. 

Also, if you live in an area with a high cost of living like New York City or San Francisco, this rule may not work for you because your rent alone will cost you an arm and a leg, and you may feel stressed that you're above the threshold.

“PERSONAL” Finance

Let me share something important with you that you may not know - personal finance is called "personal" for a reason. 

While the 50/30/20 budgeting rule can be helpful starting point for many, it might not work for everybody throughout their entire life. 

So you should adjust the budget to fit your specific situation. 

For example, if you have a lot of student debt, a 60/10/30 budget might be more effective, or if you're very frugal, a 30/10/60 budget could work better. 

Before I share my own budgeting management rule, I want to emphasize that the specific rule you use doesn't matter as much as the mindset shift that it creates. 

The goal of these budgeting rules is to change the way you think about managing money. 

Before I became serious about achieving financial freedom, I had the same mindset as the average person. 

I believed that I would work until I retired or died, whichever came first, and that I was destined to work 60 to 80 hours every single week just because that's what society says we have to do to live. 

However, one day while I was mindlessly scrolling through social media, I stumbled upon the term "financial freedom" and had a lightbulb moment. 

It hit me that I could change the trajectory of my life. 

Instead of just working for my money, I could make my money work for me and eventually have the freedom to work when and where I want. 

I could define what work meant for me. This realization convinced me to take personal finance more seriously.

Admittedly, the journey to achieving financial freedom hasn’t been easy. 

I have had to make some sacrifices along the way, such as missing out on parties and adventures to aggressively save money. 

However, I can honestly say that I have never been happier with my life and my relationship with work. 

Being able to control my finances has allowed me to reduce my stress and anxiety levels and given me the freedom to pursue the things that truly matter to me. 

Overall, achieving financial freedom has been a journey of self-discovery and empowerment, and I highly recommend it to anyone who wants to take control of their financial future.

This Worked For Me

I understand your concern about saving money, especially with the massive student debt that most millennials have. 

You might think that saving $200 a month won't make much of a difference, but the truth is, it won't help much in the short term. 

This kind of thinking is what prevents people from starting to save early because they don't see any immediate benefits. 

However, the key is to change your perspective and focus on the long term, 20, 30, or even 40 years from now, where the money you save today has time to grow. 

Don't view money as a tool to buy material things; instead, see it as a way to buy freedom and time. 

Years ago, I came to the realization that the 50/30/20 budgeting rule didn’t work for me because of how rigid and structured it was. 

Sometimes in life, things just don't fit perfectly, like a gym membership - is it a want or a need when it comes to your health? 

At the time, I was working at a supermarket and wasn't earning much, so using strict proportional buckets wasn't practical for me. 

Instead, I developed a system that I call guideline automation. While setting it up may take some initial effort, it saves so much time and stress in the long run.

Here's how guideline automation works for me:

• Step 1: My paychecks are automatically deposited into my checking account.
  
• Step 2: Each month, I transfer the money into one of two accounts that are automatically linked to the same bank - one for spending and one for saving.
  
  My spending account includes my fixed monthly bills, typical living expenses like groceries and gas, and based on historical averages, I can set spending targets for other non-essential categories like restaurants, entertainment, travel, and shopping.
  
  This allows me to avoid the stress of constantly worrying about my spending while still maintaining control over my finances.
  
• Step 3: At the end of each month, I automatically know what I didn't spend and I can move the leftover money into my savings account.
  
  The money in my savings account can be used for an emergency fund or for investments.
  

While it might seem like a lot of work to set up initially, guideline automation simplifies my finances and reduces decision fatigue, making saving money an automatic process in the background. 

As long as I stick to my spending limit and don't need to use my savings account, I know I'm on the right track. 

This strategy may not be suitable for everyone, as it requires willpower and a frugal lifestyle. 

However, once you have it down, it becomes easy. 

My budgeting system has flaws, and I'm not a robot that always saves money and never buys things. 

I strive to improve every day to reach financial freedom, which is the primary goal of this channel/page/brand or whatever you want to call it. 

I'm not here to pretend that I'm a wealthy finance expert driving a luxury car and living in a mansion. 

I'm just like you, and we're all working together to improve our financial situation.

The 50/30/20 budget framework rule can be a good starting point, but it may not work for everyone. 

You can adjust it to fit your personal finance goals through trial and error. 

Don't get bogged down in the numbers, it's better to start imperfectly than to never start at all.

- Ivan