Budgeting is an important aspect of taking control of your finances, spending habits, and your overall financial health. There are many ways and forms you can go about budgeting, but one popular way of doing so has been called the “50/30/20 Rule”. This rule consists of three different parts, each number representing a different portion of your paycheck going to certain categories such as necessities, non-necessities, and savings. According to Ivestopedia.com, “the rule is to split your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.”
50% Needs
As the name suggests, 50 percent of your paycheck will be going to needs. These are the things that you absolutely must pay for and are things that you truly cannot live without. Some items included in this section are items like mortgages and rent payments, car payments, gas, insurance payments, health care, groceries, and other bills and necessities. Whether you get paid monthly, bi-weekly, weekly, or daily, using half of your paycheck to put away for these necessities is a solid baseline for setting yourself up to be able to pay for everything that you need to without as much stress. Obviously, each individual has different needs, so if saving 50% of each paycheck still doesn’t leave you enough to pay for all of the necessities, then you have the freedom to change the rule to however works best for you. If you need 55% of your paycheck for your needs, then you can change to 25% and leave savings at 20%, this rule is only a guideline to follow, and you can change it to fit your needs as you wish.
30% Wants
Wants are the items that you spend money on that aren’t absolutely necessary, but you want to spend on. There are things like entertainment such as movies and concerts, eating out at restaurants, vacations, latest iPhone, and such. These are the things that you want to spend money on but aren’t necessary for your survival. Completely denying this section not only sets unrealistic expectations of saving everything and not buying anything that brings you enjoyment, but also defeats the purpose of having a balanced and healthy financial lifestyle.
20% Savings/ Investments
Finally, this goal is the most flexible as this one depends completely on your current financial circumstances. Someone who has lots of high-interest debt cannot be expected to put 20% of every paycheck into savings and investments. Having an emergency fund that is at least three months of your total monthly costs is generally recommended, at the very least. If you have total monthly costs of $1,500 for example, including rent payments, car insurance, gas, groceries, etc., then you would want an emergency fund of at least $4,500 saved up to help in case of emergencies. If you have achieved little-no high-interest debt and have a healthy emergency fund, then you would want to use this 20% to allocate towards savings and investments. This is where you can start contributing to your work IRAs, personal IRAs, mutual funds, or even the stock market. Once your emergency fund needs are met, this is where you can really start focusing on retirement and other financial goals that you may have further down the line.
