Budgets should be about more than just paying your bills on time – the right budget can help you determine how much you should be spending, and on what. The 50/30/20 rule of budgeting can serve as a great tool to help you diversify your financial profile, foster overall financial health, and reach dynamic financial goals.
If you are trying to become a better money manager, it is really helpful to have a clear strategy that ensures you are putting enough of your money in all the right places. The 50/30/20 rule is a budgeting framework that outlines what percentage of your income to allocate for the three of the essential parts of your budget.
The premise is simple – you allocate 50% of your budget for your essentials, 30% for wants, 20% for debt and savings.
How Does the 50/20/30 Budget Rule Work?
50% towards Your Needs
What are your needs? Typically this includes rent, food, student loans, car loans, insurance of any kind, and monthly costs for essentials and utilities. You might not have all of these expenses, and you might have others to add to the list. But, in general, half of your take home pay should go towards the necessary bills that pay for your food, transportation, and shelter.
30% towards Your Wants
The second category, and the one that can even make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. It all depends on what you want out of life and what you are willing to sacrifice. Some of these lifestyle expenses include items such as your online subscriptions, trips to the coffee shops, restaurant bills, and pubs.
20% towards Debt and Savings
The next step is to give 20% of your take-home pay toward savings. This includes saving plans, debt payments, retirement accounts, and emergency funds. This last category of expenses should only be paid after your essentials are already taken care of, and before you even think about anything in the last category of personal spending. You will pay off the debt quicker and make some more major strides towards a frustration-free future by devoting as much of your income as you can do this category.