50/30/20 Rule
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50/30/20 Rule
The 50/30/20[1] rule is a simple, practical rule of thumb for individuals who want a budget that's easy and effective. It offers guidelines for enjoying your income while putting savings on autopilot.
Keeping to a budget is sometimes difficult — and we may just need a little extra help. If you struggle making sense of a sea of budgeting systems and apps, consider the 50/30/20 rule. The 50/30/20 rule states that your after-tax income should be roughly divided three ways:
- 50% to needs
- 30% to wants
- 20% to long-term savings
The 50/30/20 rule is simply a guideline. Here's a tool to help you see how much of your monthly income should be used in each category according to the rule:
The beauty of the rule is its simplicity. Sophisticated budgeting systems sometimes can be overwhelming, complicated and stressful. Budgeting is something you may have to do your entire life. Find a way to simplify it.
Needs
People define their needs in vastly different ways, but there are several things we can all agree on: housing, food, utilities, and transportation—to name a few. Another necessity that may not jump to mind as quickly is insurance. Be it life, auto, homeowners, or health.
Examples of Needs
Housing: Rent, mortgage, homeowners insurance, property taxes
Transportation: Car payment, gas, bus or train passes, parking fees
Insurance: Auto, life, homeowners, health, renters
Utilities: Gas, water, electricity, internet, cell phone
Loan payments: Credit card debt, student loans
Short- to mid-term savings goals: Down payment on a car, a new roof, replacement furnace
Health care: Insurance premiums, deductibles, prescriptions
Note that the necessities come in two flavors: routine expenses such as some things you'll pay for regularly and predictable goals that may require you to think ahead and anticipate future needs.
The beauty of the rule is its simplicity.
Wants
While the necessities are easy to agree on, wants are subjective and personal. A vacation Jack considers valuable — essential, even — Jill finds frivolous and wasteful. The 50/30/20 rule encourages you to be clear about your wants. But don't beat yourself up over them. Give yourself permission — within a reasonable set of constraints to spend some of your money on things that make your life enjoyable.
Examples of wants
- Gym memberships
- Clothing
- Online subscriptions
- Streaming TV
- Furniture
- Vacations
- Hobbies
- Eating out
If you squint, you'll see similarities between your wants and needs. Clothing, for example, is a necessity, but spending extra cash for designer clothes is definitely more playful and probably more a want than a need. This doesn't mean you can't treat yourself with things that are fun or unnecessary, but be honest with yourself while creating your budget to balance your wants and your needs.
Savings
Saving a little each paycheck can make things much easier when unexpected expenses come up. Whether you follow the 50/30/20 rule or not, you should make a goal to save a portion of your income for rainy days and retirement.
The former is hard because, with our money, we're optimists. What could go wrong? Retirement, on the other hand, is difficult because it can seem so distant. (Surely, I can save for retirement when I get a better job, right?)
One of the great secrets to saving is finding ways to make it automatic.
Set aside a portion of your income each month in a savings account. Having a savings account may make it less likely you'll withdraw your money for spontaneous reasons. While your rainy-day fund may require a little sacrifice now, it can be lifesaving if you're laid off from work or met with a sudden medical emergency. Learn more about the types of savings accounts offered at CSB or open a savings account online — it’s fast and easy.
One of the great secrets to saving is finding ways to make it automatic. Don't put yourself in the position of deciding how much to save with each paycheck. Make the savings decision once, and ride it as long as possible.
Some employers, if they support direct deposit, will let you split your paycheck between accounts. This payment method is also a nice way to put money into a savings account automatically. Out of sight — Out of mind.
Finally, some people frown on saving money, calling it unnecessarily severe, or self-depriving. Resist that feeling. Saving is not about collecting a pile of money, rather it's about security and preparing. Saving is gratifying. You can make saving less nebulous by giving your savings a purpose. Do you want to buy a home? A new car? Go on a dream vacation? Save for that purpose.
Saving is gratifying.
Make Adjustments
Like all budgeting methods, the 50/30/20 rule is not perfect, and shouldn't be applied as defined to every budget. Saving 20% is a huge improvement for some people. For others it's low. If you're a high-income earner, for example, you may want to consider saving more than 20%, especially if you intend to travel. On the other hand, if you feel like you are just making ends meet (which is fine, we all go through it!), consider spending less than 30% on wants. Resist the temptation to compare yourself to others. Make adjustments as needed and place an emphasis on your long-term goals.
Summary
The 50/30/20 rule is a simple, practical, rule of thumb for individuals who struggle to budget. It offers guidelines for enjoying your income while putting savings on autopilot. Some folks will disagree, calling it too lenient or too strict. That's fine. Skilled budgeters and savers will develop their own habits and can be as disciplined as they like. But, if budgeting isn't natural to you—especially if you're young, and you've avoided deep debt—the 50/30/20 rule may allow you to relax a bit and put savings on autopilot.
Source:
- http://fiftythirtytwenty.com/. Accessed 2/14/2022
Disclaimer
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