As part of your financial skills, budgeting should take center stage. Feeling secure with your finances is a beneficial factor in learning to manage your money well and responsibly. Use the 50/30/20 budget rule as a strategy for financial stability.
Managing Money With A Budgeting Strategy
Financial literacy is made up of various topics surrounding money, such as investing, personal finance management, and budgeting. Its importance lies in the ability to set up a solid foundation for the success of your money and to make life a little bit easier to manage. Today, we tackle budgeting with the 50/30/20 rule of thumb. Here’s what you should know.
The 50/30/20 rule of budgeting is simple. It states that 50% of your after-tax income should get allocated to your needs. Next, 30% of your income should go towards your wants or nonessentials. And the remaining 20% of your income should be split towards savings and debt repayments.
| % of budget | 50% | 30% | 20% |
|---|---|---|---|
| Allocation | Needs | Wants | Savings |
| Explenation | Things like rent, mortgage, groceries, medical expenses, insurance, etc. | Wants are your non-essentials like streaming subscriptions, gym memberships, dining out, vacation trips or travel, etc. | Things like regular savings, emergency funds, investing, debt repayment, etc. |
A Little History Lesson
While the 50/30/20 rule is a popular budgeting strategy, it wasn’t always around. The rule originates from the 2005 book, “All Your Worth: The Ultimate Lifetime Money Plan.” It was written by the current US Senator, Elizabeth Warren, and her daughter Amelia Warren Tyagi. At the time of writing the book, the authors reference their prior 20 years of research experience to lay out a step-by-step plan for mastering personal finances.
The 50% Rule: Needs
As the rule states, 50% of your after-tax income should go toward your needs. These are non-negotiables that need to get paid without a doubt. We mean a roof over your head, food, clothing, transportation, healthcare, etc. In other words, half of your income should go towards things like rent or a mortgage, maybe a car note or public transportation, and groceries.
Remember, needs are any financial obligations. Not to be confused with nice-to-haves like your Netflix subscription or the daily local coffee shop purchase you might make on your way to work. If you find that 50% of your after-tax income isn’t sufficient to cover your needs, it may be time to downsize your lifestyle where possible, maybe a smaller home, a less expensive car, or cooking at home more often.
The 30% Rule: Wants
Next, 30% of your income should be reserved for your wants. Your wants are the non-essentials you splurge on, like vacations, the latest electronics, dining out, and more. Allocate this part of your budget for the optional things in life that really bring joy or aid in making life a bit easier to manage.
For example, instead of a meal delivery subscription, maybe opt for a less expensive option like a grocery delivery service to save time and do your cooking at home. Or, instead of signing up for a monthly gym membership, do your workouts at home and use the tons of free content on YouTube as a workout guide. In the long run, compromising to stay within your means will lead you to better budgeting practices for any financial goals you may have.
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The 20% Rule: Savings
Lastly, the 20% rule carves out a budget for your savings and investments. Your savings should also include an emergency fund for those unexpected life surprises like a broken-down car or, on the more extreme, job loss. Most of the time, savings will propel a financial goal to fruition. Savings play a role in helping you achieve goals like buying a new car or buying a home.
Your savings can also fund investments in the stock market. Something as simple as having a 401K counts as part of your savings/investments. In addition to making IRA contributions. Debt repayment also falls under your savings. Minimum payments count as a need, while extra payments to reduce a principal – and future interest – fall under the savings category.
Why You Should Care About Budgeting
Having a budget is essential for your finances and daily living. It is the source behind having more security for emergencies or just life in general. It helps you achieve personal goals, long-term or short-term. Budgeting is not only about the serious things in life but can also help you fund your more exciting ventures like traveling, starting a family, memorable experiences, and more.
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