Hey listen, I get finances hard, and the finance guru love to overcomplicate things and sound smart. Then you feel dumb because you have no idea what they’re saying. Trust me, I’ve been there. What the heck is he talking about? So let’s make everything easy to get you on the right path to financial freedom. I bet you that you didn’t know that around 35% of people have no money saved up for retirement. So that you just know that you’re not alone. But it’s also unfortunate it is kind of a really big deal because social security is expected to end even sooner than originally expected. People just don’t realize the important on why it is important to learn how to manage your money.
Sure. There’s stuff like the 4% rule. But it’s hard to accurately forecast with confidence how much you need because as you have Mr. Magically, over there, you simply can’t tell the future. You don’t know what your investment returns will be and you never know how bad inflation will get. You don’t even know what your future spending habits will be. And all these variables and more are critical to accurately calculating your financial freedom numbers. But there is a sort of strategy that you can use today.
So if you don’t want to be broke at 63 years old and only be able to afford a $5 hamburger instead of a cheeseburger. Keep reading, there’s a dirty little secret about saving for financial freedom and how you can potentially manage your money a lot better!
An easier and more effective method of dealing with money management to be more visible is the 50-30-20 rule. The 50-30-20 rule has gotten popular because of how simple it is. You can think of it as the ABCs for budgeting. So let’s break down 50 30 20.
Step one to start you want to take your advertising income or your take-home we’ll say it’s $1,000 and we’ll split it into three separate buckets, your needs, your want, and your financial goals. 50% or 500 of it goes into your needs, 30% or 300 goes into wants and 20% or 200 goes into your financial goals. The needs bucket is everything that you need to survive.
You might think, well 30%! That’s a lot of money. But we’re not talking about getting the new iPhone every year once it’s released, or treating yourself to a triple cheeseburger from McDonald’s. When I say your “wants”, I’m talking about things that you can potentially not buy such as having superfast internet, Netflix, traveling, or that iced coffee dinners.
How to differentiate Needs from Wants
Now, sometimes it may be hard to distinguish between needs and wants, but the rule of thumb is to ask yourself, can you live without it? The financial goals bucket is a broad term that encompasses emergency funds, investing, paying off extra debt, etc. Okay, let’s pause here and rewind because remember when I said 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 it off. But anything extra payments on top of the mortgage or the credit card to clear your debt faster into this bucket.
Now the 50-30-20 rule is a fantastic way to manage your money for people who are just starting 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, they’ll work that’s what we’re trying to fix. Figure out where your money is going every month and adjust your expenses accordingly. But even this rule might not work for you because it does have two serious flaws that might harm you.
Flaws of the 50-30-20 Rule
The first serious flaw happens when you’re making a boatload of money, right? First of all problems, then probably don’t follow this rule because keeping these proportions might be unnecessary. If you’re making $200,000 A year after taxes, do you need to spend $100,000 every year on your needs, I highly, doubt it. And if you force yourself into this framework that is harmful to you because you’ll feel compelled to spend more than you need to or if you live in a super high cost-of-living area in the Core central region. This framework probably won’t work for you either, because rent alone is going to cost an insane amount and then you’re gonna necessarily stress that you’re above the threshold.
How to use the Rule Better
Now let me tell you something that you probably didn’t know about managing your money. While the 50-30-20 budgeting rule may be a good rule of thumb for many who are starting their journey, it doesn’t work for everyone for their entire lives. You need to be able to tweak it so that it works for your life. If you have high loans because of student debt then maybe a 60-10-30 might be better. Or if you’re super frugal, then maybe 30 to 60.
How you can Manage your Money like a Boss
Okay, before I share my secret budgeting, management, and diversity, I’m going to clarify regardless of what tool or budget you end up using. The truth is that it doesn’t matter what matters because that’s the whole point of establishing these rules and systems in place in my eyes at least, to shift your mindset on how you think about money before I got so serious with financial freedom.
I was thinking the same way the average person thinks I was programmed with this mentality that I would work until I retire or die, whichever came first. 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 to work. But one day as I was mindlessly scrolling through Reddit, I came across this term called financial freedom and the FIRE movement. They are a small group of individuals who became popular because of how they share their strategy to break the cycle of working till they are 65 and only retiring for a few years.
This gave me a lightbulb moment and realize that I can instead of working for my money, I can make my money work for me and eventually have the freedom to work when and where I wanted to work. And be able to define what work meant for me. And so that convinced me to start taking personal finance more seriously and so far, it’s been great.
Here are the steps you can take to better manage your own personal finance.
Step 1: Money Distribution
Once you have received your paychecks. The first thing you need to do is distribute your finances evenly for the 50-30-20 rule. You can do that by having at least 2 accounts. The 2 accounts that you need to have are spending and high-interest savings account. If you are planning to save 20% of your income, placing 20% of your paycheck into the saving account would be a smart thing to do.
Step 2: Managing Spending Account
Knowing how much I typically spend in a month, based on historical averages, set spending targets for other stuff like restaurants, entertainment, travel, and shopping. The spending account is used to manage fixed bills, and typical living expenses like groceries, gas, and rent. It is also good if, at the end of every month, there is a remainder left from the spending account. This means that you have managed to find ways to reduce expenses.
Step 3: Automate your Finances
Step three: At the month’s end, I automatically know what I didn’t use up and can move the leftover into my savings account. The money from my savings can either be part of my emergency fund or go into my investment accounts. I also use a free money-tracking app called Money Manager to see my spending categories and whether or not I’m on track to hit my financial goals.
The psychological effect of being able to simplify my finances, even more, reduces my decision fatigue and I don’t feel like saving money is an additional step in my life that I need to do. That makes sense. It just becomes something that’s done automatically in the background. And as long as I stick within the spending limit that I have in my spending account, and I know that I don’t need to use anything from my savings account then I do well.
Why Every Penny Counts
So you’re probably thinking, what’s the point you save $200 a day? How is that going to help? And the truth is it’s not going to help much right now. And I think this is the mentality that causes people to not want to start saving early. They don’t see the advantages in the short term because there is no not trick to shifting your way of thinking and focusing on the long term on the horizon.
Don’t look at money as a way to just buy physical things. Start looking at money instead as a way to buy freedom. And time I realized years and years ago that the 50-30-20 budget wasn’t a good fit for me personally, because I hated how structured and defined it was. Sometimes things in life just don’t fit perfectly. Like a gym membership, right? Is that a want or a need when it comes to your health when I was working at a supermarket it didn’t make much sense because I wasn’t getting paid much?
So instead of using extreme proportional buckets, I use this thing I call buy low, sell high buy guideline automation. Now to be transparent setting guideline automation up does take a bit more work to get started. But it saves so much more time and headaches in the long run. Guideline automation makes it so that I don’t have to worry about money and I don’t need to constantly track if everything is going according to plan and here’s how my money works.
Willpower to control your Personal Finance
Now again, this strategy might not work for you. It does require more willpower and living a generally more frugal lifestyle. But once you’ve got that down then it becomes super easy. And don’t get me wrong. I’m not perfect. My budgeting system has flaws. And I’m not a robot that always saves money and never buys things but I’m trying harder to get better every day to reach financial freedom. I’m not gonna sit here and put on a facade and pretend that I’m a brilliant personal finance guy. I’m driving a Lambo. I live in a mansion. I’m just like you. We’re all working together through the struggles so we can become better with our money. But back to the point the 50-30-20 budget framework rule. It’s not a bad starting, but it just might not work for you.
The good thing is that you can tweak it until it fits nicely into your personal finance goals. So go through trial and error and find something that works. But my biggest advice is don’t get lost in the numbers or overanalyze this and that it’s better to start imperfectly than just keep thinking about how to start perfectly but if you want to reach financial freedom.