Saving Money: Understanding the 50-30-20 Budgeting Rule
Personal Finance

Saving Money: Understanding the 50-30-20 Budgeting Rule

Story Highlights
  • The 50-30-20 Budgeting Rule is a simple and straightforward financial framework.
  • By dividing your spending into buckets of needs, wants, and savings, it encourages its adherents to make informed financial decisions.

Creating a monthly budget is a key component of good financial hygiene, allowing you to to break down and review your income and expenses. The 50-30-20 rule can be a useful mechanism to help organize and plan your finances.

The reasons for the popularity of the 50-30-20 budgeting technique is both its simplicity and understanding of human nature. Read on to understand how the rule works and how it can help you plan out your budgeting decisions.

What is the 50-30-20 Rule?

The 50-30-20 rule is an organizing principle for planning how to allocate your after-tax income. According to this rule, you will devote 50% of your income for needs, 30% for wants, and 20% will be used for either savings or paying off your debts.

Breaking this down, the 50% basket of needs includes your absolute necessities. This would include rent or mortgage payments, food, utilities, transportation, and any other non-negotiables such as childcare and insurance.

20% of your income would be dedicated to savings, which could be for a retirement account such as a 401(k) or an IRA. It could also be used to pay down debts, create an emergency fund, or to save for a down payment on a house. Whatever your savings goal, the 50-30-20 rule is designed to make sure that you are putting monies aside for the future.

Lastly, 30% of your money will be used for wants. One of the greatest advantages of this framework is that it acknowledges that we all have desires, not just current and future needs. Living like a spartan and depriving ourselves from having any fun whatsoever is simply not the goal. Not only is this not sustainable, but trying to do so will make it virtually impossible for most to stick within the confines of their budget.

What is the Primary Goal of the 50-30-20 Rule?

The primary goal of the 50-30-20 rule is to help you create an organizing principle that you will be able to abide by. Budgets and plans are only as good as your ability to live within them, and the 50-30-20 rule allows its followers to take care of their necessities, future needs, and current desires.

In essence, the 50-30-20 is a guideline that allows its followers to live within their means. But it is also designed to help them reach their long-term objectives.

However, the 50-30-20 rule might not work for all, and you should not automatically view it as a non-negotiable structure with no room for modification.

For instance, low-income earners and those living in expensive locations might find that they will need to devote more than half of their income to pay for their needs. These individuals will likely be forced to allocate larger portions of their after-tax income for rent and other essentials.

In a similar vein, just because you have funds available does not mean that you need to spend them on all your desires. It follows that those earning higher levels of income should not feel obligated to spend up to 30% of their finances on discretionary purchases.

Perhaps the greatest benefit of the 50-30-20 rule is that it will force you to be aware of your finances and how you are using them. By understanding that you will need to devote 60% of your after-tax income to needs, you will be able to plan out where you will cut down on your other expenses.

Finding a budget plan that works for you is the point. You are not helping yourself by rigidly committing to a budget that does not fit your circumstances.

Changing Your Budgeting Mindset

The essence of a budget is to help you meet your financial goals, keeping you on track to cover items that are important and avoiding those that are less central.

For many, this often means forgoing immediate pleasures in favor of future desires. This can cause many to view a budget in a negative context, as it will force them to miss-out on certain activities or purchases.

However, a budget can be thought of from a more positive perspective. Instead of focusing on what you are not able to do, think about what sticking with a budget will allow you to accomplish.

Maybe it is a long-term goal like owning a home or living a fulfilling and comfortable retirement. Perhaps it is a dream vacation. Or, alternatively, it could also be a fancy new gadget. Whatever the case may be, a budget should be considered as a roadmap that will lead you to your desired financial destination, both in the immediate future and farther along the path of life.

Conclusion: Budgeting for Your Needs

Understanding how you are spending your money will help you to make smart financial decisions, creating a pathway towards the life you want to live. The 50-30-20 rule is a simple, easy-to-follow framework that will help you organize your finances into buckets of your needs, your wants, and for your future.

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