The 50/30/20 budget rule allocates after-tax income into three distinct categories: 50% for needs, 30% for wants, and 20% for savings. This budget is simple to follow and every dollar is accounted for. This ensures that there’s no uncertainty where money is going and can show where adjustments need to be made. Its flexibility can work for any lifestyle and income so each category and percentages can be changed case by case.
But first, you need to go over your spending habits and determine your after-tax income, to divide it accordingly.
The 50% category includes everything that you wouldn’t be able to live without:
- Rent or mortgage payments
- Car payments
- Insurance payments
- Health care
- Debt payments
Since you need a roof over your head, vehicle to get around, and food to eat, it’d be hard to eliminate any of these payments. Choosing affordable options such as choosing a less fancy car or a smaller place to live can help you save more money. It’s all about spending within your means.
The 30% category includes non-essentials that you don’t need to survive or can be replaced with cheaper alternatives such as:
- Going out
- Electronic upgrades
- High-speed Internet
- Streaming services
Everyone deserves to spend their money how they want, however, if it hurts your finances without any limits, it might be hard to do enjoy the non-essentials for long.
Finally, the 20% category is putting money away for the future. This could be for retirement or any emergencies that may happen. It’s suggested to have at least 3 months of savings in the case of sudden job less or other crises. These include:
- Mutual fund contributions
- Emergency cash
You can always adjust the savings category according to your financial goals. If your main goal is saving for the future, you can take funds from the other categories and put them into savings.
Why does the 50/30/20 work?
The 50/30/20 category is a great starting point for any one’s first budget. It gives you the peace of mind that you have enough money every month so that you won’t be in a rough spot in case of an emergency.
Its flexibility, as mentioned earlier, makes it easy to adjust the budget according to your income and lifestyle. It shows you a picture of your spending habits and where you can save a few extra dollars.
All About Financial Goals
You might find as you put together your budget, that you may be spending too much in one category. In order to make your money work for you, consider your financial goals:
- Debt-free – to pay off all your debts as quickly as possible, you’ll have to downsize the other categories at a reasonable rate to do so.
- Retirement – saving earlier is always a good idea and you can do this by cutting down on the less essentials.
- Good Spending Habits – for people just starting out with an income, this budget helps show spending limits.