Income Management Tips
How to Divide my Income
This article gives instructive insight into how you can work your way up with steady savings. How can I divide my income?
Many people ask me, ‘How can I divide my income’? The most effective way to divide your income is to use a standard formula that works. Most people have attempted various methods with some success or failure. But the most effective method for income management is to use the 50/30/20 formula.
The 50/30/20 Rule: The Effective Way to Budget Your Money
The simplicity of this formula makes it the ideal method that you can use to divide your income into categories that makes savings easy and efficient. It is common practice for every business owner or employee to want to manage their earnings. Saving for a cause or retirement is something deeply entrenched within every individual.
What is the 50/30/20 Rule Formula?
The 50/30/20 rule is a budgeting method that can help you manage your money effectively, efficiently, and sustainably using a simple mechanism. Using this formula, you divide your after-tax income into three spending classes: 50% for needs, 30% for wants, and 20% for savings or paying off debts.
By adopting this rule and balancing the three main spending areas, you can put your money to work more efficiently and sustainably. By using the rule, you save yourself the stress of tracking the finer details of your spending since you only have three major areas of spending to track. Income management proves easier to conduct with such a formula than by unconventional methods most people use.
Benefits of the 50/30/20 Rule
- The 50/30/20 rule helps keep your expenses balanced across the three main areas, giving stress-free tracking of your money.
- Helps solve the age-old riddle of the inability to save more by building more structures in your spending habits over time which may ultimately drive you into making more savings.
- It makes it easy to reach your financial goals or solve the riddle of paying off a heavy debt.
Why You Should Use This Rule for Income Management
The 50/30/20 Rule is not just a creation of the people, but a well-researched method originating from the book, “All Your Worth: The Ultimate Lifetime Money Plan” by US Senator Elizabeth Warren and her daughter Amelia Warren. With references to twenty years of research, Warren makes very passionate conclusions that you do not need a complicated budget to check finances.
She draws the line between balancing your spending across your needs and saving, making it easier and more elaborate to understand and adopt the rule. And it works as flawlessly as using an income management System.
The core of this formula divides your expenses into three categories;
50% spending on needs
50% of spending is basic expenses that are unavoidable. They may include;
- Electricity and gas bills
- Commuter expenses
- Insurances costs such as health or motor insurance
- Loan repayments
- Basic groceries
At least half of your after-tax income should address the above needs, leaving you with the other half to address other wants and savings. Here is where a critical decision is necessary. You may find that your needs go well over the 50% mark.
When you face such a critical challenge, you should strive to lower your basic needs to a manageable level. Some of the steps you can take include taking a cheaper accommodation, restructuring your daily spending on groceries, or changing from using superstores to local stores. Local stores sometimes sell products at lower prices than superstores.
30% Spending on Wants
- Dining out
- Clothes shopping
- Taking Holidays
- Memberships such as Gym Memberships
- Other non-critical groceries
The formula structure allows you to use 30% of your after-tax income on such wants. If you discover to have been using more on wants, it is time to cut down on unnecessary expenses. You can also drop some of the expenses by making priorities. For instance, you may decide to drop your Gym membership in favor of taking the family out every month.
To check your spending, you should always gauge any expenditure with the critical question, “can I live without it”? If you can, drop it to increase your income savings.
The remaining 20% can be used to reach your savings objectives or repay any outstanding debts after allocating 30% of your monthly income to wants and 50% to needs.
You can create a better, more enduring savings plan by consistently setting aside 20% of your monthly income. It doesn’t matter if your ultimate objective is setting up an emergency fund, creating a long-term personal financial plan, or saving for a down payment on a home, it will be easier to achieve your goals.
The Steps to Applying the 50%/30%/20% Rule
How can you effectively apply this rule to speed up savings? To actualize this simple budgeting rule, you need to calculate the 50%30%20% ratio based o your come and then categorize your spending. This is how;
Calculate Your After-tax Income
Your first step in this budget rule is to calculate your after-tax income. If you are in business, this is what you earn after you have deducted your monthly business expenses. For those with monthly paycheques, it is a lot easier to calculate your after-tax income.
Categorize Your Spending
The next step is to categorize your spending for the last month. It should give you a brief overview of how you spent your last month’s income and help you restructure how to allocate to the current budgeting plan.
Evaluate & Match Your Spending to the 50&/30%/20% Rule
Now that you have an idea of how much goes towards your needs, wants, and save each month, you can now adjust the ratio to 50%30%.20% rule. To do that, you will relook into the past ratio and restructure it accordingly to come up with a perfect match for your budget model. If you can strike the balance, you will be surprised by how easy it is to manage your earnings.
Sticking to your budget rule can help you manage your income and make considerable savings. The income management system is now mandatory for both personal and business fixed-income management. The state of the economy does not allow careless spending. You have to put things in order to meet the demands of the ever-changing economic landscape of the 21st century.