When buying a home, use the 50/20/30 Rule as a guideline.
The 50/20/30 Rule is easy because instead of telling you how to break down your budget across 20 or more different categories (who could possibly keep track of that?), it splits everything into three main categories:
1. Essential Expenses
No more than 50% of your take-home pay should go toward Essential Expenses, which are the expenses you need in order to maintain the fundamentals of your life: shelter, food, heat, etc. Only four expenses go in this category: housing, transportation, utilities and groceries.
2. Financial Priorities
At least 20% of your take-home pay goes to Financial Priorities, which are the goals that are essential to a strong financial foundation. These include your retirement contributions, savings contributions and debt payments, if you have debt.
You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.
3. Lifestyle Choices
No more than 30% of your take-home pay should go to Lifestyle Choices, which are personal, voluntary and often fun choices about how you spend your discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants, bars, shopping and other miscellaneous expenses.
While Lifestyle Choices are the last things you should buy in your budget, you should never feel guilty about that expensive purse or ordering a nice bottle of wine at dinner … as long as you’ve taken care of your Essential Expenses and Financial Priorities first.
