The 50/30/20 rule is an easy budgeting technique that divides your income into three categories: 50% for needs, 30% for wants, and 20% towards savings or debts. This can provide you with a clear big picture overview of your budget each month and can help prevent overspending. In this post I’ll breakdown how it works and what should be considered for each category.
This rule takes in account your after-tax monthly income (take home pay). Let’s say you make $100,000 and after taxes your pay would be roughly $72,000. Your monthly income would be $6,000. If you followed this budget, you would have $3,000 a month for your needs, $1,800 for you wants and $1,200 for savings.
50% for Needs
These are expense that you can’t live without. Your largest expense is probably housing. In my previous post, I talk about how much you should spend on your home. The most common expenses that fall in this category are:
- Basic utilities
- Minimum loan payments
- Child care
If you are overspending on your needs, you might have to make changes. Obviously, you could cut spending, but I recommend finding ways to grow your income. Spending can only be cut so far, but income has no upper limit. Finding small ways to grow your income today can help you upgrade your lifestyle without overspending. You can read about ways to increase your income in next week’s post.
30% for Wants
Generally, wants are non-essential items that you could live without if you needed to. These items are often for fun or entertainment. Common examples are:
- Dining out
- Excess shoes and clothes
- Monthly subscriptions
20% for Savings
Try to put away 20% of your take home pay towards savings. This could help you prepare for the future and build a financial cushion. This would likely include:
- Establishing an emergency fund
- Saving for retirement: 401(k), Roth IRA, Brokerage, etc.
- Paying off debt, especially high interest type
The key is to find a budget strategy that you can stick to long term. Once you do that you’ll be in great shape. The 50/30/20 is helpful strategy to start building your budget.
A good way to implement the 50/30/20 strategy is by setting up automatic withdrawals to take 20% out of your paycheck. This money could be going to your emergency fund, 401(k), Roth IRA, or other savings. I like to follow the Warren Buffet quote, “Do not save what is left after spending; instead spend what is left after saving.”
As always, if you have any question or would like to create your financial plan, feel free to reach out.
Disclaimers and Sources:
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice.