Breaking Down the 50-30-20 Rule
Knowing where your money is coming and going starts with a solid budget. Building a budget you can stick with doesn’t have to be complicated. Here’s one way budgeting can be more manageable.
Have you heard of the 50-30-20 Rule?
If you’re new to budgeting, it’s easy to get started by following the 50-30-20 Rule:
50% = Needs
These are the things you can’t do without: groceries, housing, utilities, health insurance, and transportation—to name a few. Most of the time, these amounts are consistent, but it is important to review them regularly. Ideally your “needs” should account for 50% of your take-home income.
30% = Wants
The first time you think about this category, you might jump to larger luxury purchases, like a day at the spa or buying the entire updated line of Universal Thread at Target. But wants aren’t necessarily extravagances. They are the basic ‘niceties’ of life, once needs are covered.
They can be considered “flex costs”, like your cable plan, your cell plan, or your lawn service. If your wants are higher than 30% of your take-home income, ask yourself which of them can be cut or reduced from your monthly budget.
This can prove to be a challenge, but think of it as good budgeting challenge for yourself to see how much you could potentially save just by cutting back on one or two wants.
20% = Savings (and Debt Repayment)
Saving money every month is important. It can help you cover unexpected expenses as well as achieve your long-term financial goals. Try to save and pay down debt up to 20% of your take home income.
Pro-tip: If it looks like remembering to start saving could be a challenge, try automating your savings.
Automating your savings, means you’re automatically putting aside part of your take home income, without the hassle of moving money around. You can always start small, with $5 or $10 per paycheck and increase that amount over time.
So maybe now you’re asking yourself, “What happens if I take a hard look at where and when I spend my money and my 50% is really 60%, and my 30% is 40%, and my 20% is Zero?”
How can I get my budget in line and have one I love?
First, take a hard look at where and when you spend your money and make small changes that will stick. If your housing costs are high, maybe consider getting a roommate. If you eat out more than you eat in or need to be among the first with the latest and greatest tech gadgets, recognizing these habits is the first step. Once you’ve identified where your money is going, choose one or two changes to help you gain more control. Maybe pare back your cell or cable plan. Or limit the number of times you eat out a week. Don’t try to knock down all your spending at once. Start small and see steady success.
And remember: be sure to make room for fun stuff. A budget is not a set of handcuffs. It’s knowing and controlling where your money is coming and going. Much like a diet, if you cut out all the foods you love, it’s tough to follow … so be sure to include some fun.