Budgeting is the perfect tool for anyone navigating the ins and outs of personal finance.
Whether you are new to budgeting or want to freshen up your personal spending and savings plan this article is for you.
Experts agree that one of the simplest techniques to implement for your budget is the 50/30/20 rule. The 50/30/20 rule recommends to divide up after-tax income and allocate it to spend: 50% on needs, 30% on wants, and putting away 20% to your savings.
Having only three categories or focus areas can help you fine-tune your budgeting plan instead of getting caught up in the detailed structure of keeping track of each individual expense.
This category is for the bills that are needed for survival. Included in this category are rent and mortgage payments, utilities, groceries, insurance and health care, plus minimum debt payments. The 50/30/20 plan recommends that half of your after-tax income is dedicated to cover these needs. If you find that your needs are exceeding 50% of your income, consider that it might be time to start thinking about alternatives.
As much as we can internally feel otherwise, wants are considered spending areas such as vacations, going out to dinner, Starbucks coffees, and gym fees. While it can be difficult to part with certain wants, such as subscriptions to our favorite apps or streaming services, these expenses can really add up over time. While it can be tempting to ignore this area, if you take a hard and honest look at what you are spending in your wants category, it can free up some space to enjoy this category even more or even dedicate a larger percentage to savings which can help you with an unexpected expense down the road.
Experts recommend having three months of emergency savings on hand at all times in case you lose your job or another unforeseen event enters your life. An emergency fund should be the first savings area you put money into, and in the event those funds are used, the next time you have additional income it should be replenished first to this category. Making IRA contributions or investing in the stock market are two more categories that can be dedicated to the savings area of your budget.
Is the 50/30/20 rule right for me?
Personal finance is always personal. This can be a sound budgeting method for some, but depending on your circumstances, there may be better ways of budgeting. For individuals living in a high cost of living area, 50% may not be enough of a percentage to cover your individual needs. In certain situations, it may be impossible to keep your needs under 50% of your income.
In other cases, experts have expressed concern that for high-income individuals this plan does not fulfill the need for a higher percentage allotted to savings or debt.
Ultimately, this is a simple approach to keep your finances in check, without getting buried in the finer details and sometimes discouraged by the time or money it can take to detail out an in depth plan.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.