It’s no secret that budgeting is the single most effective way to ensure your family is prepared for a financially secure future. But how can you make sure you’re also using your financial resources in the most effective way? Thats where the 50/30/20 rule comes into play!
This model of budgeting helps you make everyday spending decisions without having to track every single penny by following these basic guidelines:
50% to Fund Your Needs
Take 50% of your income and put that towards your absolute needs. This includes your housing, food, utilities, health care, transportation, child care, loan payments and anything associated with maintaining your job.
"Within this category of spending, there are some other rules of thumb to follow. For example, personal finance experts recommend that you should spend no more than 30 percent of your total income on housing. That leaves 20 percent of your paycheck to cover other essentials." Depending on where you live, keeping your mortgage or rent payment under 30 percent of your income can be difficult. So, you might have to make cuts elsewhere in your budget to keep your needs spending at about 50 percent of your income.
30% to Fund Your Wants
Simply put, this is where you focus on the fun stuff! Gym memberships, the movies, your vacations, entertainment and trips to Starbucks. Setting aside this very adequate amount of money every paycheck will help you minimize overspending, as well as help you avoid having spending-related guilt.
"People aren't robots who wake up, go to work, and come home and get ready for the next day. Everyone needs some fun in their lives, so it's important to take some time to relax and spend some money on things that you enjoy."
20% to Fund Your Savings Account
Whether its for your retirement, or a nest-egg for emergencies – setting aside money for the future is imperative to having some financial security when you need it.
How you build that safety net will vary depending on what your financial situation is, but for the most part we recommend:
• First focusing on building an emergency fund. This would help cover unexpected emergencies, and cover 3 to 6 months worth of living expenses.
• Then, if you have any kind of credit card or school debt, work to pay down on those balances. Getting yourself out of debt quicker will pay off in the long run where you can save more later.
• If you’re interested in amping up for retirement, don’t forget to check out how your 20% fo savings can be used in tax-advantaged accounts like 401(k)s and IRAs that allow you to deduct your income when you file for taxes.
The Bottom Line
While the 50/30/20 rule isn’t the perfect fit for every situation, it is a solid framework to support financial decisions for people of all ages, and all incomes. And you don’t even have to follow it perfectly to make it be effective!
