Money tip – What Is the 50/20/30 Budget Rule?
The 50/20/30 budget rule is an intuitive and simple plan to help people reach their financial goals.
The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do.
The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or bond payments, car payments. Also groceries, insurance, health care. And in addition, minimum debt payment and utilities. These are your “must-haves”.
The “needs” category does not include items that are extras, such as, Netflix, movies, and dining out.
Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle. Perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution or cooking at home more often.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag. Also, tickets to sporting events, holidays. And in addition, the latest electronic gadget, and ultra-high-speed Internet.
Anything in the “wants” bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out. Or watch sports on TV instead of getting tickets to the game.
This also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger. Buying a Mercedes instead of a more economical Honda. Choosing between watching television or spending money to stream. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account and investing in the stock market. You should have at least three months of emergency savings on hand in case you lose your job. Also if an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.
If emergency funds are ever used, the first allocation of additional income should be to replenish the emergency fund account.
Savings can also include debt repayment. While minimum payments are part of the “needs”, any extra payments reduce the principal and future interest owed, so they are savings.
In closing, try the 50/20/30 budget rule it’s a template that is intended to help individuals manage their money and save for emergencies and retirement.
Until next time.
The MoneyShop Team
This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.