50-30-20 Budget: What It Is & How To Create One
When was the last time that you planned out a personal budget? If it’s been a while, now is an excellent time to sit down and create, or re-create a simple roadmap for how your money should be spent. But where do you start? How much money should you be saving? How much should you allocate towards utilities, eating out, entertainment, and so on?
Creating an effective budget is easier than it might seem, and following a practical plan can give you a better idea of your personal financial situation. In this blog, we will take a look at a popular budgeting technique known as the 50-30-20 rule.
What Is The 50-30-20 Rule?
The 50-30-20 rule is a money-spending plan that breaks down your after-tax income into three categories: needs, wants, and savings/debt. 50% goes towards necessities, 30% to things that make life a little more enjoyable, and the final 20% is set aside for savings and debt payments. Creating this budget is fairly simple, and it only requires a few basic calculations.
Let’s look at an example: If your after-tax monthly income were $4,000, you would multiply this number by 0.5, 0.3, and 0.2 to calculate the dollar amount that should be allocated to each of your budget categories. In this instance, $2,000 would go towards needs, $1,200 would be spent on wants, and $800 would be set aside for savings and/or debt.
What counts as a want and a need? And which costs are considered savings and debt? Great questions. There are some specific spending categories to keep in mind when deciding which expenses fall into what category.
50 – Needs
Needs are those expenses that you can’t live without. These costs include housing expenses, utilities, minimum payments on debt and credit cards, transportation (car payments, gas, public transport costs, etc.), healthcare, basic clothing, and food. Expenses that fall into the 50% category should be those things that are an absolute necessity for your day-to-day life.
30 – Wants
This category encompasses all those extras that are nice to have but not essential to your health and wellbeing. Some examples of wants include trips and vacations, dining out, gifts, memberships, streaming services, entertainment, gifts, and other things that aren’t necessary for basic survival. If it becomes difficult to tell the difference between a want and a need, ask yourself — can I live without it? Medical prescriptions and running water are must-haves. However, cable TV and going out to fancy restaurants — while nice every once in a while — aren’t things that you absolutely need.
20 – Savings and Debt
The final category of the 50-30-20 budget rule covers savings and debt. This money should be set aside for emergency funds, retirement plans, or paying down existing debts faster than you normally would. It is important to remember that minimum payments on debts like student loans and credit cards do not fall into this category. Those payments are critical for maintaining good financial standing and good credit. The debt payments in this category refer to those over and above your minimum payment, the ones that help you pay down your overall debt and save interest charges over time.
The Bottom Line
Having a budget for your personal finances is a responsible way to plan out your day-to-day spending while allowing you to set aside money and save for the future. With a solid budget in place, you can build a stable foundation of financial wellness, manage your debt, plan for retirement, and be a better manager of your finances overall.