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Saving up for your first home can seem like an overwhelming task- especially if you don’t have a good grasp of your monthly budgeting and cashflow. But luckily, there are relatively easy guidelines to follow when managing your money for a real estate purchase. You don’t need to be a financial expert to understand how much you should be saving relative to your income and other expenses. Simply following the 50-20-30 rule can act as a basic rule-of-thumb to help you organize your finances.
The 50-20-30 Rule breaks down your monthly budget into three spending categories:
- Not more than 50% of your income should go to essential living costs. This includes rent, bills, food, transportation, and insurance.
- At least 20% of your income should go towards your financial future; either in a savings account, or towards investments, or debt reduction payments.
- Not more than 30% of your income should be used for personal choices. This includes all non-essentials such as gym memberships, entertainment, travel and recreational shopping.
Note that the percentages for essentials and flexible spending are the maximum suggestions. By hacking away at those numbers, you can allocate more of your budget towards saving for your downpayment.
To start, you need to have a good understanding of your income and your monthly expenses. If you’re self employed, look at your pay stubs to determine exactly how much money you’ve been making over the past year. Then, track your spendings by dividing them into one of the three categories (essential, financial savings or personal choices). From here, you’ll be able to notice if and where you’ve been over-spending, and where it’s possible to cut back. You can then adjust your budget to ensure you fall within the 50-30-20 parameters.