The 50/30/20 budget rule is one of the best tools if you don’t have the patience to track your spending in detail. Learn how this simple and intuitive budget rule works that can even help you to improve your credit score over time.
In simple terms, the 50/30/20 budget rule requires you to track and divide your expenses into three categories, needs, wants, and savings (or debt). You need to calculate your after-tax income before identifying the dollar amount for each category.
Simply start with your take-home pay on your paycheck and add back the deductions that don’t count as taxes. Some of the items may include things like health insurance and retirement contributions.
How to use the 50/30/20 budget rule?
First, calculate how much money you can allocate to your needs, wants, and savings (debts). For instance, if $6000 is your after-tax income per month, you’d have $3000 for your needs, $1800 for wants, and $1200 for savings or debt.
Now that you know how much money you can spend under each category, determine which expense you should add under each of them. Here are some general guidelines to follow.
50% – Needs
The bills you must pay for the things necessary for survival are a part of this category. These bills include rent or mortgage payments, healthcare, insurance, utilities, and minimum debt payments. These are your must-haves, so the needs category excludes extras like Netflix, Starbucks, dining out, HBO, and so on.
Half of your after-tax income should go towards your needs and obligations. If you spend anything more than that, you’ll need to downsize your lifestyle and make changes, such as moving to a smaller apartment, driving a modest car, and cutting down on buying luxury items.
30% – Wants
These are the things that are not absolutely essential, including dine-outs, movies, and so on. Anything optional is a part of this category. Choose to work out at home instead of a gym, prepare food at home instead of eating out, watch your favorite game on TV instead of getting tickets to the game.
This category also includes the upgrade decisions you make, like choosing an expensive steak in place of a less expensive hamburger, purchasing a Mercedes instead of a more economical car, and so on. In general, wants are all those little extras you indulge in that make your life entertaining and more enjoyable.
It’s easy to confuse many wants as needs. A simple trick to determine if something is a need or want is to ask yourself whether you can live without it or not. If you can, it’s a want.
20% – Savings
The money you set aside for your future or to pay off your debts faster than required is a part of this category. This money can help you build an emergency fund, a retirement fund, save for a down payment on a home, pay off your student loan debt or credit card debt, and manage other financial crises.
Is the 50/30/20 budget rule good for you?
In all honesty, Americans are not good at saving money. Besides, the country has high levels of debt. The 50/30/20 budget rule can help several people manage their finances more efficiently. Since there are only three categories to track under this rule, you can focus better on fine-tuning your finances.
The lack of structure could make it harder for others to find ways to improve their spending habits. In the end, you need to decide whether a budgeting system that is less detailed or highly detailed will be best for you.
A potential problem with the 50/30/20 budget rule is the process of breaking down and allocating money to your needs, wants, and savings (debt). In fact, based on your income and place of living, 50% may not be enough to cover your needs.
For instance, if you live in an area with expensive housing costs, a large part of your income may go towards it, making it impossible to keep your needs under 50% of after-tax pay.
Also, a few critics believe that the 50/30/20 budget rule doesn’t work for high-income groups since it calls for too much spending on wants versus needs or savings and debt.
The final words
Saving is challenging, but it’s crucial to be prepared for tomorrow because life can throw unexpected expenses at any time. Although, you shouldn’t force yourself to live like a Spartan.
There’s no guarantee that the 50/30/20 budget rule will work for you, but there are other budgets you can try to improve your financial health.
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