Budgeting in Style: 50/30/20 Rule
January 2, 2020
It’s no secret that most people, us included, increased their shopping habits over the holidays. While spending is inevitable, there are ways to educate yourself on budgeting and smart spending. For starters, our friends over at Banzai Literacy have created a tool to help stay on track according to your income, by using the 50/30/20 rule. The 50/30/20 rule is a simple, practical rule of thumb for individuals who want a budget that is effective and easy to implement. It offers guidelines for enjoying your income while putting savings on autopilot. This rule states that your after-tax income should be roughly divided three ways:
- 50% to needs
- 30% to wants
- 20% to long-term savings
Of course there will be times when you need to deviate from this rule slightly, but it will help guide you to make smart spending and savings decisions. Here is a calculator tool to help you see how much of your monthly income should be used in each of the categories.
Since many of us would most likely place a different variety of items in each category, let’s break it down one more notch and establish what is typically a need, want or long-term savings expense.
Needs: These are expenses that are a necessity to your well-being. You’ll notice morning drive-thru coffee isn’t on the list – we were disappointed too.
- Housing: Rent, mortgage, homeowners insurance, property taxes
- Transportation: Car payment, insurance, gas, public transport passes, parking
- Short- to mid-term savings goals: Down payment on a car, a new roof, replacement furnace
- Health care: Insurance premiums, deductibles, prescriptions
- Insurance: Auto, life, home, health
- Utilities: Gas, water, electricity, internet, cell phone
- Loan payments: Credit card debt, student loans
Wants: This category will be the trickiest to categorize, as it will vary from person to person. However, in general here are some examples of ‘wants’. While you may consider some of these needs, such as clothing and food, most people can purchase these items more inexpensively if they are honest with themselves when categorizing their expenses.
- Gym memberships
- Online subscriptions
- Cable TV
- Furniture/household items
- Eating out
Long-Term Savings: For most, this is the most difficult to add to the budget, since it’s hard to imagine needing an emergency fund when you are currently perfectly healthy. But taking the steps to set aside an emergency fund now is crucial for those surprises that life throws at us.
This also a great time to set up various accounts for larger purchases you are saving for. Such as a vacation, new car, down-payment on a home, holiday expenses, etc. Imagine if before the next holiday season, you looked at your financial account and you have the perfect amount of money already set aside to spend on your loved ones. All it takes is a little set-up time up-front, but the more you are able to automate your savings goals into a money market or savings account, the better chance you have of following through consistently!
Be on the lookout for our next blog that will dive deeper into how to increase and maintain your savings!
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