How to master your budget with 'Rule of Three' technique
What's the story
The Rule of Three is a simple budgeting technique where your expenses are divided into three categories for better financial management.
It ensures your essentials are taken care of, but also allows for room for discretionary spending as well as savings.
This technique encourages a balanced financial approach, providing insights and tips on how to implement an effective budget.
Essentials
Allocate 50% to essentials
The first step of the rule of three is to allocate 50% of your income to essential expenses.
These include housing, utilities, groceries, transportation, and healthcare.
By prioritizing the necessities, you ensure that your basic needs are fulfilled without overspending on non-essential items.
This allocation keeps your financial life stable by focusing on what truly matters for day-to-day living.
Discretionary spending
Dedicate 30% to discretionary spending
After covering essentials, allocate 30% of your income to discretionary spending.
This category includes entertainment, dining out at vegetarian restaurants or cafes, hobbies like gardening or painting supplies, and other personal indulgences that enhance quality of life.
By setting a limit on discretionary expenses, you can enjoy leisure activities without compromising financial security or dipping into savings.
Savings
Save 20% for future goals
The final piece is saving 20% of your income for future goals like retirement funds or emergency reserves.
Saving a robust plan prepares you for unforeseen events such as medical emergencies or job loss.
It also clears the path toward long-term goals such as buying a home or traveling abroad when financially possible.
Personalization
Adjust percentages based on personal needs
While the standard rule suggests a 50%, 30%, and 20% split among essentials, discretionary spending, and savings, respectively, it is important to adjust these percentages according to individual circumstances if needed.
For instance, someone with higher fixed costs might need more than half their budget allocated toward essentials, whereas another person may choose less due to lower living expenses.
Tailoring this framework ensures optimal results tailored specifically toward unique situations faced by each individual.