The 50/30/20 budgeting rule originates from the book “All Your Worth: The Ultimate Lifetime Money Plan” written by Senator Elizabeth Warren and first published in 2005. The main concept of this budgeting rule is to divide after-tax income into three categories namely needs, wants, and savings. Here is a brief breakdown of this simple budgeting strategy.
50% for needs
Needs are unavoidable expenses—payments for all of the necessities without which life would be impossible. These are the “must-haves” for you. In other words, needs are the bills that you have to pay and the goods you require for survival. Rent or mortgage payments, auto payments, groceries, insurance, health care, minimum debt payments, and utilities are examples of these expenses. Your most essential expenses should be covered by 50% of your after-tax income.
To meet your demands and commitments, half of your after-tax income should suffice. If your needs cost more than that, you’ll have to either cut back on your wants or reduce your lifestyle.
30% for wants
Wants are things you want but don’t require to live. All of the things you spend money on that aren’t absolutely necessary are considered wants. This includes hobbies, dinner out, movie tickets, new handbags, vacations, etc. Anything in the “wants” is optional. In other words, wants are things you want but don’t require to live.
After paying for your most basic needs with 50% of your after-tax income, you can spend 30% of your after-tax income on your wants. Remember to always prioritize your basic needs before fulfilling your wants. If your needs exceed 50% of your after-tax income, you should reduce your budget for fulfilling your wants.
20% for savings
The last budgeting rule is to set aside your net income for savings and investments. After allocating 50% of your monthly income to your needs and 30% to your wants, the remaining 20% can be used to meet your savings goals or pay back any outstanding debts. You can allocate 20% of your money to the emergency fund, contribute to IRA on a mutual fund account, and invest in the stock market.
Besides, if you lose your job or anything unexpected happens, you should have at least three months of emergency money on hand. After then, concentrate on retirement and other long-term financial goals. Putting aside 20% of your earnings every month can help you construct a better, more long-term savings plan.
The 50/30/20 budgeting rule is a simple way to keep your finances in order for those who don’t prefer extensive planning. With only three primary categories to keep track of, you won’t have to go into as much detail as you would with a traditional budgeting.
Unfortunately, due to some circumstances, such as living in a high-cost-of-living area, the 50/30/20 rule cannot work for everyone. You can adjust the rule based on your particular needs and financial objectives by changing the percentages. Besides, there are a variety of other budgeting options you consider for your wealth management.
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