The 50-20-30 Rule Proves that Living Paycheck to Paycheck is a Good Thing!

Well, we’re just going to scrap the cutesy introduction and get right to it… living paycheck to paycheck is a good thing.

There, we said it.

Now, before you stop reading altogether, allow us to explain.

We’re not talking about living paycheck to paycheck because you have no other choice; we’re talking about consciously deciding to live paycheck to paycheck, because it makes financial sense.

You see, it’s all about living within your means, which can translate to divvying up each paycheck in a manner proportionate to your costs, goals and spending… in essence, living paycheck to paycheck.

To avoid any unnecessary stress that financial matters undoubtedly can cause, there are rules involved with purposely living paycheck to paycheck. In fact, there is a method that we particularly favor and it is one that our friends at LearnVest have outlined quite nicely.

According to their 50/20/30 guideline, it is possible for everyone from recent college graduates to soon-to-be retirees to effectively pay their bills, save some money and even spend a little cash, no matter what their salary restraints may be.

The 50/20/30 rule works off of your net salary, or take-home pay, after all taxes and benefits have been removed. To keep it simple, there are three specific categories:

1. Fixed Costs – This category includes recurring bills like rent or mortgage payments, essential utility costs, car payments and even gym memberships… basically, everything that you can count on dishing out on a monthly basis. According to the 50/20/30 rule, no more than 50% of your take-home pay should be devoted to these costs.

1. Financial Goals – Here’s where the saving comes into play… but, not before the credit card debts and student loans. As a financial goal, those debts will likely go away and allow for extra cash that easily can be placed into retirement or emergency funds. LearnVest’s 50/20/30 rule says that no more than 20% of a person’s take-home pay should go toward financial goals.

1. Flexible Spending – And, now to play devil’s advocate! This “flexible spending” is the 30% of your net pay that is to be devoted toward day-to-day expenses like dining out, buying groceries, going shopping, filling your car with gas or paying for any other entertainment choices. Ideally, the 50/20/30 rule says that no more than 30% of your take-home pay should be used as this “fun money.”

Of course, when it’s outlined in those three “easy” categories, the 50/20/30 rule not only looks appealing, but it also seems doable! Now, it’s time to take a hard look at your finances and see how your current bill-paying/saving/spending ratio is divided. Are you anywhere near the 50/20/30 rule? If you’re close… call it a day and take comfort in the thought that you’ve got your financial situation under control… within reason.

If you’re nowhere near that 50/20/30 split, relax. Budgeting is hard work and everyone has different saving and spending habits. But, by using the 50/20/30 rule as a guideline, living paycheck to paycheck actually makes financial sense.

Once you’ve realized that living paycheck to paycheck actually can be a great thing, it may be a bit easier to recognize your personal financial goals… like putting a payment down on a dream home, buying a vacation home, investing in an income property or whatever else you’re working toward.

So, the question remains… are you ready to make that choice and willingly live paycheck to paycheck?

This post is sponsored by PA Preferred Mortgage:

Pennsylvania Preferred Mortgage is a full service mortgage banker and is a member of the Prosperity Home Mortgage, LLC family. Specializing in residential and refinance loans, Pennsylvania Preferred Mortgage offers a wide range of mortgage products, including fixed and adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, and renovation financing. Learn more at www.papreferredmortgage.com.