The 50/30/20 rule of budgeting is a simple way to help you keep your finances in order. The rule is this: 50% of your income should go towards your essentials, 30% towards your wants, and 20% towards savings or debt repayment.
Some people might need to adjust the percentages slightly, but the general idea is that you should be allocating your money in this way.
Let’s break down each percentage a little further.
Your essentials include rent or mortgage payments, groceries, utilities, transportation costs, and other necessary expenses. This category should take up no more than 50% of your total income.
Your wants would include entertainment, dining out, travel, and other non-essential purchases. This category should make up 30% of your total income.
The final 20% can be allocated towards savings, debt repayment, or both. William Schantz of Mid Atlantic Financial LLC recommends that savings include items like an emergency fund or retirement contributions, while debt repayment could encompass things like student loans or credit card balances.
How To Use The 50/30/20 Rule
Now that you understand the basics of the 50/30/20 rule, let’s look at how you can put it into practice.
1. Determine your income after taxes. This is the number you’ll use to calculate your percentages.
2. Figure out your essential expenses. These include rent, utilities, transportation costs, and groceries. Once you’ve added up all your necessary expenses, divide that number by your total income. The answer should not be more than 0.5. If it is, you must determine which items you can let go of or compromise on.
3. Calculate your wants. This could include entertainment, dining out, travel, and other non-essential purchases. Add up your discretionary spending and divide it by your total income. The answer should be less than 0.3. If it is more, you will need to cut down on some of your desirables
4. Determine your savings and debt repayment goals. This final category should include retirement contributions, an emergency fund, and student loan or credit card payments. Although we have mentioned it last, it is the first thing you need to do. As soon as you get your income, take 20% and allocate it to your savings or debt account.
5. Evaluate your budget. Once you’ve calculated the 50/30/20 targets for each category, look at your overall budget. Are you able to meet all of your targets? If not, where can you make adjustments?
The Benefits Of Using The 50/30/20 Rule
As per William Schantz, there are a few key benefits to using the 50/30/20 rule of budgeting.
- It’s simple. This budgeting method is easy to understand and implement.
- It’s flexible. The 50/30/20 rule can be adjusted to fit your unique circumstances.
- It works. This budgeting method can help you achieve your financial goals.
Final Thoughts
According to William Schantz, The 50/30/20 rule is a great starting point for anyone looking to get their finances in order. It’s simple to understand and easy to implement and can help you achieve your financial goals.
The rule helps ensure you’re not spending too much money in any area. You can avoid financial difficulties down the road by staying mindful of your spending and keeping your budget balanced.