If you are seeking information about budgeting and saving, then you may have heard or come across the 50/30/20 Budget Rule and you may already know a bit about it.
The 50/30/20 Budget Rule is a popular budgeting tool for people who don’t have time to keep track of their spending. It is also an excellent way to manage your expenditures, save money, and control your finances.
In this article, we will explain exactly what the 50/30/20 Budget Rule means and how it can be applied to your finances to help you meet your lifelong financial goals.
How The 50/30/20 Budget Rule Works
The 50/30/20 Budget Rule requires you to divide your expenditures into 3 categories:
- Your Needs
- Your Wants
- Your Savings/Debts
For example, if your income is $4500 per month after taxes, you will allocate 50% of your income ($2500) toward your Needs; 30% ($1350) toward your Wants; and 20% ($900) toward your Savings/Debts. To to divide your expenditures effectively, you will need to perform the following steps:
Step 1: Limit Your Needs
Your Needs are things you can’t live without, such as housing, health care, transportation, utilities, food, clothing, minimum debt payments, and other necessities. This category should only include items that you CANNOT live without.
If you don’t have a budget, this would be the ideal time to start one. Begin by carefully analyzing the things you spend your money on each month that fall within this category.
Experts say your Needs category should not exceed 50% of your monthly income. If it does, then something is wrong.
If you do spend more than 50% on your Needs, you should carefully re-evaluate what you spend your money on each month. A good way to do this is to keep track of your expenditures to gain a good picture of where your money goes.
Once you know where your money is going, adjust your Needs by reducing or eliminating unnecessary expenditures or finding less expensive alternatives. When your budget matches the 50% limit, you can move on to the next step.
Step 2: Define Your Wants
Allocating 30% of your income toward your Wants may seem like too much money. But bear in mind, by “ your Wants” we are not talking about that expensive pair of boots you’ve been dreaming about, or that brand new top-of-the-line iPhone you desire.
Instead, “your Wants” refers to expenses that make your life easier, but that you can do without. For example, your home internet plan, mobile data plan, cable or satellite TV plan, cosmetic (as opposed to mechanical) repairs to your car, etc.
Sometimes it can be hard to distinguish between your Needs and your Wants. The rule of thumb for defining a Want is by asking yourself if you can live without it. If you can, then the item is most likely a Want and Not a Need.
Step 3: Maximize Your Savings
The final 20% of your monthly income should be allocated toward savings and paying off your debt, if you have any. Money in this category can be used as an emergency fund, as a down payment on a home, for investing, or retirement savings. Furthermore, if you believe that 20% isn’t enough, you can transfer more income into this category from your Wants category.
With regards to debt, the only debt that should be included in your 20% category is that which is above the minimum required payment. For example, additional extra credit cards or mortgage payments made to clear your debts faster should go into this category.
On the other hand, your minimum required debt payments should be accounted for in your Needs category. This is because your minimum required debt payments are compulsory and failure to pay them will result in adverse effects on your credit status, which you do not want.
The 50/30/20 Budget Rule is great for lifetime budgeting because it helps you to easily track your expenditures. Also, the rule is to apply and follow.
Dividing your monthly income into 3 categories creates a structure that is easy to follow and helps you to manage your money better. Moreover, the 50/30/20 Budget Rule is less detailed, making it perfect for individuals with busy lifestyles and less time for budgeting.
What’s more, if you are experiencing financial difficulties, the 50/30/20 Budget Rule can help you get your finances back on track. By following the guidelines properly, you can be one of the many people who have used the 50/30/20 Budget Rule to turn their finances around and achieve their financial goals.
The 50/30/20 Budget Rule works very well, for people whose income is below $6000 per month. However, high-income earners should be careful not to allocate too much of their income toward their Needs when using the 50/30/20 Budget Rule.
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