What is the 50/30/20 Budget Rule?

Use the 50-30-20 rule to be smarter and more successful with your money!

Managing your finances and setting a monthly budget can be challenging. But if you’re overwhelmed with were to start, to 50-30-20 strategy can simplify the process.

The plan divides your income into three broad categories:

• Necessities
• Wants
• Savings

Here’s a closer look at each.

1. 50% for Needs.

Needs are things you absolutely must have. The 50/30/20 rule says you should spend about half of your take-home pay on these essentials. Some examples of needs include:

There are some additional rules of thumb to consider within this category. For example, personal finance experts recommend that you spend no more than 30% of your total income on housing. That leaves 20 percent of your paycheck to cover other essentials. Depending on where you live, keeping your mortgage or rent payment under 30 percent of your income can be difficult. You might have to make cuts elsewhere in your budget to keep your needs spending at 50 percent of your income.

2. 30% for Wants.

Wants include non-essential spending, or discretionary spending, on things like gym memberships, trips to the movies, vacations, dining out and streaming-service subscriptions. These expenses can include:

Gym membership or free outside exercise can be classified as a need most certainly! Everyone needs some fun in their lives, so it’s important to take some time to relax and spend some money on things that you enjoy as well. Setting aside a specified portion of your income gives you the ability to buy a new outfit or book a weekend getaway and still maintain your budget.

3. 20% for Savings

One-fifth of your income should go to savings and investments. Everyone should have an emergency fund, which can cover three to six months. How you save money will vary based on your financial situation.

One of the first things you should do is build a modest emergency fund for when you encounter an unexpected expense, such as a car repair or health-related bill. Experts usually recommend having an emergency fund equal to three to six months of living expenses.

If you have debt, you can dedicate a portion of your savings to making additional payments to pay down your balances. This is even more crucial if you have high-interest debt, such as credit card debt or an auto loan. This will get you out of debt sooner, freeing up space in your budget in the future. It also helps you save money on interest payments.

If you’re saving for retirement, consider investing in tax-advantaged accounts like 401(k)s and IRAs that let you deduct all or part of your contributions from your income when you file your taxes.

Using one of these tax-friendly retirement savings accounts funded with pretax dollars can let you save more than you otherwise would.

An example of a 50/30/20 budget.

Here’s an example of the 50/30/20 budget in practice.

Is the 50/30/20 rule budget right for you?

The 50/30/20 rule is a great budgeting strategy for many people. It reduces the need to create a detailed budget with precise spending amounts and a dozen or more line items and also provides a framework you can use to make financial choices.

The 50/30/20 rule may not work for people with very low or high incomes. Someone who works a minimum wage job might have to dedicate more of their income to necessities, leaving themselves with less money to spend on wants and savings. On the other end of the spectrum, a highly paid executive who makes $1 million per year probably doesn’t need to spend $40,000 on necessities each month.

Article Credit: https://www.bankrate.com/banking/what-is-the-50-30-20-rule/