The 50/30/20 Budgeting Rule Explained
You may or may not have heard of the 50/30/20 budgeting rule, but it’s a good one – one that will help make organizing your finances a lot simpler. The basic idea is to divide up your after-tax income and allocate it to spend this way: 50 percent on your needs, 30 percent on wants and 20 percent on savings. Below are more details on how to do this.
Spend 50 percent on needs. These bills are those that are necessary for survival, such as rent/mortgage, groceries, utilities, health care, insurance and paying the minimum amount on your debts. Other things like Starbucks, Netflix and dining out might feel like needs, but if you get honest, they really aren’t. (They fall into the next category.) To get started, here’s a free worksheet. If you’re spending more than 50 percent on your needs, then look for areas to cut expenses or downsize your lifestyle. For instance, you could eat in (and make delicious coffee at home), maybe take public transportation to work or even choose a smaller home or more modest car. While these compromises might not be very fun, they’re necessary to make you fiscally healthier. Plus, they’ll pay off in the long run, which will feel really good.
Allocate 30 percent for wants. The best way to look at this category is to think of everything that is optional. It includes obvious choices like going to your favorite restaurant, joining a gym, buying that new techie gadget or a gorgeous new purse. Another way to frame wants are, for instance, choosing a more expensive entrée like lobster instead of a pasta dish, or buying a Mercedes instead of a no-nonsense Honda. That said, living a spartan life with no feel-good experiences isn’t realistic. We all have desires. But if you find you’re spending more than 30 percent on these things, a way to cut back is to plan ahead on splurging and do it less often. This way, treating yourself might feel better than it normally would.
Sock 20 percent away on savings. This category, of course, includes your savings account, as well as investment accounts like IRAs, mutual funds and stocks, which may or may not be part of your retirement. Besides saving money to pay for future bills, it’s also recommended to put away at least three months of expenses in an emergency fund, should you lose your job or have unexpected events occur. If you spend this allotment, start replenishing it as soon as you can. Other things that fall into savings are paying more on your debt instead of minimum payments because you’ll be reducing the principal and future interest you’ll owe; so in effect, you’re saving. While tucking funds away might seem impossible, once you get in the habit of it, you won’t miss it. And a few months down the road, when you take a look at the sum you’ve accumulated, you’ll most likely be super happy.
Admittedly, saving money and managing it is a challenge – you’re not alone. As of January 2022, the personal saving rate was 6.4%, down from 8.2% in December 2021. So take heart. If you’re saving anything at all, you should count that as a victory. You’ll be way ahead of the crowd. In the end, seeking a financial equilibrium and erring on the side of saving will contribute to a more abundant life in the long run.