We all know that budgeting is a great secret to being good at personal finances. The 50/ 30/ 20 rule makes it simple and easy even for everyone. Check it out!
The 50/30/20 budgeting method can be a great tool for people who don’t have the patience to divide their spending into detailed categories. This rule is a simple outline for your budget that only requires you to track and divide your expenses into three main categories: needs, wants, and savings or debt.
It works like this:
• You should spend 50% of your after-tax income on needs.
• You should spend 30% of your after-tax income on wants.
• You should put 20% of your after-tax income towards savings or debts
To do this we need to define a couple of things:
Your after-tax income is the net income after the deduction of all federal, state, and withholding taxes. Once you’ve figured out this, and have calculated the dollar amount for each category, you must divide your expenses into needs, wants, and savings.
Needs are the things you can’t leave out of your budget and include housing, health care, insurance, education bills, or transportation costs.
Wants are the things you choose to spend your money on but are not necessary. Eating out, Netflix, Spotify, expensive brand clothes, or alcohol could be examples.
Savings and debts include paying off loans, building an emergency fund, canceling credit card debt faster, or investing in your retirement.
The only tricky part of this rule may be to distinguish what is a want and what is a need. Saving for your first house is considered in the Savings category while saving for a vacation would fall under your Wants category. Of course, the 30% of your income spent on wants can be cut down if you are wanting to save more money.
Thie 50/30/20 rule can be made even easier to follow if you download a spending tracker to review your spending each month automatically.