How to Budget Your Money Using the 50/20/30 Rule
What is the 50/20/30 Rule?The 50/20/30 rule is a common budgeting tactic that helps you lay out your budget in the simplest form. Popularized by Senator Elizabeth Warren, this rule splits your after-tax income into three brackets. Here’s the breakdown; 50% needs, 20% savings and 30% wants. Reducing the amount of time spent detailing multiple categories and allowing you to focus on the big picture.
There are a few variations on what is meant to go into each category so it is up to you to decide what fits best to your life and spending habits. Learn more about the specific items that fall within each category.
How to Budget using the 50/20/30 Rule
- 50% Needs. Monthly charges that you can expect every month to live a normal life. This refers to mortgage or rent, car payments, groceries, insurance, utilities and more. Any payment that you can forgo with only minor inconveniences are not included. Only things that would severely impact your quality of life should be included. This could also mean debt payments minimums as it would impact your credit score if you did not pay these.
- 20% Savings. Financial goals are your savings, 401k and anything that is helping you invest in the future. This is a great place to build up your emergency fund. 20% may be too high for you but provided that you are putting something into your savings and not using it to cover overspending, you are making progress. Additionally, any extra debt payments other than the minimum is lumped into this category.
- 30% Wants. Anything that is not a necessity or savings. These are things like your “fun” money, entertainment, subscriptions, restaurants and shopping.
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