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Importance of Personal Finance: 50/30/20 Rule

Did you know the average American with a bachelor degree earns 2.2 million dollars over their lifetime? Yet around 40 percent of that same population does not save enough of their money due to taking on too many expenses so most of that total is lost to the world instead of being placed in a […]

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Did you know the average American with a bachelor degree earns 2.2 million dollars over their lifetime? Yet around 40 percent of that same population does not save enough of their money due to taking on too many expenses so most of that total is lost to the world instead of being placed in a savings account or a safe long term investment. 

In most cases it isn’t their fault, we live in a world where finance is the most important part of our life, but 76% of people in America are considered to be “Financially Illiterate”. What makes it worse is that our systems are built to take advantage of this. Realtors push you to buy the most expensive homes in your budget assuming that your only expense will be the house. Car salesmen push you to buy the most expensive car they can, never taking in account the whole financial picture.

We live in a society that teaches us that bigger and more expensive is better and Ads tell us to buy super new things that we barely need. Like do you need an LCD TV on your refrigerator that allows you to watch youtube while you’re opening the fridge? Probably not, but it exists and for some reason I feel the need to have it. This is where some financial literacy and an understanding of personal finance would come into play. 

Personal Finance can really be simplified down to how individuals plan and organize their money. This term is kind of broad and covers something as simple as how much you should save each paycheck, or as complicated as what is the best financial vehicle to save towards my retirement.

While I have your attention on this article I will teach you a very simple personal finance principle. Budgeting is a buzzword that is tossed around, but even with a budget sometimes it is difficult to determine what targets should be hit in order to be considered financially healthy.So you could spend all your time budgeting and still hit a wall. The 50/30/20 rule is a quick way to determine if your budget structure makes sense. This requires you to know your complete post tax income. The rule states that 50 percent of your income can be spent on needs, things like food, housing, insurance, bills etc. While 30 percent of your salary can be spent guilt free on many of your wants such as vacations, dining out, and new gadgets. The final 20 percent is going directly into debt repayment and savings, the exact configuration of that 20 percent will vary from situation to situation. 

The goal of the rule is to allow you to understand if you can afford your lifestyle and let you know if you need to make any changes in order to be considered financially healthy. It also allows you to understand what areas of your life you are making sacrifices in if any. Let’s provide a nice round example using the American Average in consumption with a total household income of $100k. 

CategoryIdealActual
Needs50,00060,000
Wants30,00036,000
Savings20,0004,000

From this example, although this family could be living and staying true to their budget it becomes clear that they are over spending on their needs. They could have more house than they can afford, cars that have large payments or over paying their phone bills. It also becomes clear that they are over consuming on things that they want. Both these things combined means they are unable to save at the suggested rate, but are inline with the American Average of 4%. This is why financial literacy and understanding personal finance can be important for you because it can help prevent yourself from getting in a similar situation. In a future article, we will explain through the concept of compound interest why having a high savings rate can help you in the long run. Here is a quote from Tony Robbins to hold you over until then:

“The real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years. That’s how you will become wealthy while you sleep. That’s how you will make money your slave instead of being a slave to money.”

If you wish to better understand the magic of personal finance I suggest doing some individual investigation and learning principles for yourself. If you would like someone to consolidate some ideas for you in one place consider following this page and joining our Financial Literacy group where we will offer our expertise and discuss financial concepts. 

CONTACT:

Contact Name: James L. Foo Torres
Phone Number: 787-969-4770
Email: [email protected]
Website Link: https://www.exponentialfreedom.net/networking-groups

SOURCE: James L. Foo Torres

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