Budgeting Best Practices: What’s the 50, 30, 20 Rule?
December 26, 2019
The best thing about budgeting is that the right way to do so is, usually, also the way that works best for you considering your goals. Sometimes, however, figuring out the right fit can take a little while. Luckily, there are a handful of tried and true methods that work for many savers at different stages of their personal finance journey.
If you’re in the process of figuring out what budget works best for you, the 50, 30, 20 rule could be your answer to simplifying your savings process.
The 50, 30, 20 budgeting rule separates your spending habits into three categories and dictates what percentage of your income is allocated to that percentage.
The breakdown looks like this:
- 50% of your after-tax income is assigned to your needs and obligations. Included in this category is your rent, mortgage, loan/debt payments, utilities (internet, gas, water, etc.), groceries, and generally any expense that is a necessity. This would not include more frivolous purchases like eating out or buying yourself a little treat.
- 30% of your after-tax income is assigned to your wants. Included in this category is going out to eat, purchases that go above necessities like concert tickets, a fancier bottle of wine, artisanal groceries, the newest electronic tool, and any item or experience you’d like to purchase that you could delay purchasing without consequence.
- 20% of your after-tax income is assigned to your savings. Included in this category is every avenue where you aspire to save more money. This means if you’re still working on your emergency fund but would also have a rainy day fund developing, and you’re saving for a car, your aspiration is to spread your 20% between these funds. Of course, however, if your priorities differ from this, how you save your money is up to your jurisdiction. Regardless, the goal is to sequester 20% of your money to save.
Does this budget work?
Let’s start with savings. Smart Assets states “of the Americans who have savings accounts, the median balance of transactional accounts is $4,500.” Depending on your age, income, and expenses, this may be a good amount of money to have stored. Regardless of how much you do or do not presently have in your savings account, it’s important to cultivate skills so this balance can continue to flourish and grow. Starting with a more fixed and universal budget can help you start building upon the skills necessary to save more money.
The 50, 30, 20 budget creates a way for savers and spenders to not feel too stifled by a budget that would stop them from using their money how they wish. Instead, this budget acts as a guideline that helps people work on spending within their means.
As you proceed with this budget, you might find it helpful to adjust these percentages to be more representative of your spending habits. Maybe 30% is too much to spend on your wants? Perhaps you’d like to up your savings percentage. Budgets can sometimes act like a fingerprint—they’re unique to you. However you decide to budget, be sure your plan works for you!
Tax season is just around the corner!
Don’t let this annual to-do become a stressor. Take a look at our tips to make tax season simple by understanding federal tax withholding!
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