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The 50/30/20 rule is a budgeting strategy that allocates 50 percent of your income to must-haves, 30 percent to wants and 20 percent to savings. It is a simple plan that works well for those who wish to place each of their expenses into one of just three categories — and make changes to their spending and saving habits, as needed. 50 percent for needs
Needs are things you can’t live without. The 50/30/20 rule budgets about half of your take-home pay toward these essentials, which often include: Housing Groceries Utilities Health insurance Transportation Loan minimum payments Child care There are some additional rules of thumb to consider within this category. For example, personal finance experts recommend spending no more than 30 percent of total income on housing. That leaves 20 percent of your paycheck to cover the other essentials. Depending on where you live, keeping your mortgage or rent payment under 30 percent of your income can be difficult. You might have to make cuts elsewhere in your budget to keep your needs spending at 50 percent of your income. 30 percent for wants
Wants include nonessential spending — or discretionary spending — on things like gym memberships, trips to the movies, vacations, dining out and streaming-service subscriptions. These expenses may include: Hobbies Dining out Vacations Gym memberships Movie tickets Concerts Subscriptions Nonessential clothing Nonessential services Everyone needs some fun in their lives, so it’s important to devote some of your money to things you enjoy. Setting aside a specified portion of your income for this purpose gives you the ability to start a new hobby or book a weekend getaway and still maintain your budget. You can also use to connect your bank, credit card and loan accounts in one place. This can help you categorize your spending transactions, identify ways to cut back and improve your financial health. 20 percent for savings
One-fifth of your income should go to and investments. Experts recommend having an that can cover three to six months’ expenses. An emergency fund comes in handy when you encounter an unexpected expense, such as a car repair or doctor’s bill. If you’re saving for retirement, consider investing in tax-advantaged accounts like and that let you deduct all or part of your contributions from your income when you file your taxes. Using one of these tax-friendly retirement savings accounts funded with pretax dollars can help you save more than you otherwise would. If you have debt, you can dedicate a portion of your savings to making additional payments to pay down your balances. This is even more crucial if you have high-interest debt, such as or an . This will get you out of debt sooner, freeing up space in your budget in the future. It also helps you save money on interest payments. An example of a 50 30 20 budget
Here’s an example of the 50/30/20 budget. Determine your income. Let’s say you have $2,000 deposited into your bank account each month from your job. An additional $100 was deposited into your 401(k). That gives you a total monthly income of $2,100. If you are paid biweekly, there may be months where you receive three paychecks. Identify those months and adjust your total income accordingly. Apply the spending thresholds. If you used the 50/30/20 rule, you’d allocate $1,050 for needs ($2,100 x 0.5), $630 for wants ($2,100 x 0.3) and $420 for savings ($2,100 x 0.2). Plan your budget around these figures. Take a look at your current spending and plan to adjust it to these dollar amounts in future months. TOTAL MONTHLY INCOME $2,100 Needs ($2,100 x 0.5) $1,050 Wants ($2,100 x 0.3) $630 Savings ($2,100 x 0.2) $420 Is the 50 30 20 rule budget right for you
The 50/30/20 rule is a simple budgeting strategy that can eliminate the need to create a detailed budget with precise spending amounts and a dozen or more line items. It also provides a framework you can use to make financial choices. The 50/30/20 rule may not work for those with very low or high incomes. Minimum-wage earners, for example, may have to dedicate more of their income to necessities, leaving them less money to spend on wants and savings, whereas a highly paid executive who makes $1 million a year may not need to spend $40,000 on necessities each month. What experts say about the 50 30 20 rule
, CFA, Bankrate chief financial analyst, agrees that this budgeting strategy might not be for everyone. “Many households may have difficulty implementing the 50/30/20 budget because they’re currently hemmed in by high housing, insurance, and child care costs that push them well above 50 percent of net income,” McBride says. “In any event, start with the savings component by automating retirement and emergency savings contributions via payroll deduction or automatic bank transfer and look to increase the amount you’re saving with each pay raise and every time you pay off a debt.” The 50/20/30 rule is relatively easy but it may require work to discern between wants and needs, says , CFP, founder of Financial Staples, a financial planning firm. “The idea of setting up a budget can be intimidating or confusing. This strategy provides a relatively easy guideline,” Moore says. “You can also evaluate our current spending and savings against this strategy as a way to see how you measure up. It can be hard to sort out wants and needs, and these categories are very subjective. For example, food is a need. Some groceries could fall into the need category while other groceries or dining out could be considered a want.” Bottom line
The 50/20/30 rule can work well for consumers wishing to simplify the budgeting process and to ensure they’re putting some of their money into savings. Though it might need to be modified for lower- or higher-income individuals, it can provide a basic framework for getting household finances on track. –Freelance writer TJ Porter contributed to a previous version of this article. SHARE: Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters. David Schepp is a wealth editor for Bankrate, focusing on deposits and consumer banking content. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Related Articles