Budgeting: 40-20-20-20 Rule

With so much varying financial advice, it can be hard to decide exactly how to divide your income to ensure that you'll meet all of your important life and financial goals. Drawing the line between wants and needs, making sure that you have sufficient savings and investments without depriving yourself, and categorizing your expenses are some of the issues that come up when you are trying to budget your hard-earned income.

Although the decision on how you should budget your income is still in your hands, we still want to get advice from people who've done it time and again. And after searching for tons of ways to budget your money, you still aren't sure if they will fit in your lifestyle.

If you want a budgeting rule that will allow you to finance your daily living expenses, enable you to still do what you want, take care of your debt payments, and still save and make a few investments, then the 40-20-20-20 rule is something worth considering.

Personally, I divide my earnings using this rule. I am a man of few wants and I already have the important things that I need. Although this budgeting rule will enable you to finance almost all aspects of your financial life, it will limit the allocated budget for your needs since it will only allocate less than what the general rule of thumb is suggesting. Let us discuss each part of the rule:

1. Allocate 40% of your income for your needs.

Instead of allocating 50% of your income for your needs—which is the general rule of thumb—this budgeting rule will limit your budget for your necessary living expenses to 40%. This is to free up a few parts of your income to your other expenses and financial requirements or obligations.

Needs, to put it simply, are expenses that you can't live without. Rent, mortgages, car payments, insurance (life, health, auto, fire, etc.), and food are the perfect example of expenses you can't live without.

2. Allocate 20% of your income for your wants.

My wife and I love to travel from time to time. We do it everytime we get a chance to get out of town or country. Aside from travel and vacation, you can use this part of your budget for giving gifts, entertainment, and other leisurely expenses.

This part of your income will enable you to still enjoy life while taking care of your daily expenses, financial obligations, and preparation for your future.

3. Allocate the other 20% of your income for your debt payments.

If you have debts or loans that you need to pay aside from your house and auto payments, then you should use this part of your budget to pay for them. This will allow you to take care of your financial obligations without jeopardizing other parts of your lifestyle.

4. Allocate the remaining 20% of your income for your savings and investments.

Life isn't just about paying bills, taking care of your obligations, and minding about the present. We should also keep part of our income and make it grow for our future. Using the last 20% of your income so you can build a surplus and grow it for your future will enable you to prepare not just for today but also for the years to come.

At the end of the day, only you can determine the right budgeting rule for your own lifestyle, financial obligations, and requirements. A budget should set it you up for success, not to limit you in any way.

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