If you’re having a hard time sticking to your budget each month and just can’t cut any more expenses, take a step back and re-evaluate your approach. Coming up short at the end of each month may simply be a result of miscalculating your “true” expenses—not necessarily mismanaging your money.
Fortunately there is one simple budgeting trick you can use to better manage your budget: the 20% Rule.
How the 20% Rule Works
Let’s say you’ve calculated your monthly expenses by adding up all of your bills for the month—one of the first steps to creating your budget.
You add up all of your bills, including food, rent or mortgage, utilities, insurance, and other recurring expenses, and your total ends up being $3,000 for the month. Applying the 20% Rule means you actually need to budget for $3,000 plus 20%, which would be $3,600.
The reason why this works is that the majority of people tend to underestimate their expenses in any given month.
Even if you are very meticulous about tracking every bill and expenditure, you may overlook some miscellaneous expenses and always find yourself coming up short at the end of each month. The best thing you can do for yourself is create a cushion for those miscellaneous expenses so you are always working with a more realistic number.
If you find that you do have extra money month after month, you can adjust your budget at that time.
Why Being Too Restrictive Backfires
It’s always a good idea to keep track of your expenses and make sure you are spending in a budget range you are comfortable with.
However, getting caught up in reaching your goals by being too restrictive can end up backfiring. You will “feel” the pinch of pinching pennies and may even end up going on a shopping spree to compensate.
Employing the 20% Rule eases some of the pressure of sticking to a very tight budget and makes it much more feasible. You are still accounting for your expenses responsibly and also maintaining a realistic cushion to account for anything you might overlook over the course of the month.
Keep your budget on track without being overly restrictive by using the 20% Rule to redesign your budget. You’ll be surprised how much easier it will be to manage your finances and avoid a financial disaster.