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Last Updated January 25th, 2022 - Melissa Davidson

5 Minute Read

Tags:
  • mortgage,
  • housing,
  • borrowing and credit,
  • life changes,
  • investing,

The 50/20/30 Rule

The 50/20/30 rule is an easy budgeting method that can help you manage your money effectively, simply, and sustainably.

What is it?

An easy budgeting method that can help you manage your money effectively, simply, and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories:

  • 50 % for needs
  • 30 % for wants
  • 20 % for saving or paying off debt

The 50-30-20 Rule is an intuitive and simple plan to help people reach their financial goals.

50 %: Needs

Your needs are those bills that you absolutely must pay and are the things that are necessary for survival. This can include your mortgage or rent payment, car payments, insurance, health care, utilities, and groceries. These are your “must haves.” The “needs” category doesn’t include items that are extras, such as Netflix, Starbucks, and dining out. Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will need to try to downsize your lifestyle. Such as finding a cheaper place to live or a more modest car.

30 %: Wants

Wants are things that you spend your money on that are not absolutely essential. This would include dinner and movies out, beauty products and handbags, sporting events, vacations, and the latest and greatest electronics. Anything that falls under wants is optional.

20 %: Savings

Lastly, try to allocate 20% of your net income to savings and investments. This can include a savings account, making IRA contributions, or investing in the stock market. Savings can also include debt repayment. The goal for your savings should be able to cover three months of your “needs” in case of an emergency situation.

Saving can be difficult and life will often throw unexpected expenses and circumstances at us. The 50-20-30 is intended to help individuals manage their after-tax income, for the purpose of having funds on hands for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost. Life should be enjoyed, and it is not recommended we live a sparse lifestyle, 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 life fulfilling.

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