What Is the 50/20/30 Budget Rule?
The 50/30/20 budgeting rule – also referred to as the 50/20/30 budgeting rule – divides after-tax income into three different buckets:
- Essentials (50%)
- Wants (30%)
- Savings (20%)
Essentials: 50% of your income.
Your essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include: Housing, Food, Transportation costs and Utility bills.
Wants: 30% of your income.
The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you are willing to sacrifice.
The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.
Savings: 20% of your income.
The next step is to dedicate 20% of your take-home pay toward savings. This includes savings plans, retirement accounts, debt payments and rainy-day funds
Summary:
This budget rule is a simple method that can help you reach your financial goals.
Saving is difficult, and life often throws unexpected expenses at us. By following the 50-20-30 rule, individuals have a plan with how they should manage their after-tax income.
If they find that their expenditures on wants are more than 20%, they can find ways to reduce those expenses that will help direct funds to more important areas such as emergency money and retirement.
Life should be enjoyed, and it is not recommended to live like a Spartan, but having a plan and sticking to it will allow you to cover your expenses, save for retirement, all at the same time doing the activities that make you happy.
