So a number of years ago I was listening to the radio in the morning (yes, the radio, not a podcast. I’m not cool, I’m Just. Not. Cool). 🙂
They were talking about a budgeting method called the 50-20-30 rule. The meat of the plan is this:
- 50% of your budget goes to your needs
- 20% goes to savings and debt
- 30% is for your wants
The great thing about this rule is that it’s simple and easy to remember. Applying it can be a bit harder, so let’s start by talking about each of these parts.
50% for Your Needs
These are the basics of living. This includes your rent/mortgage, your car payments or commuting costs, utilities, groceries, health insurance, car insurance, phone, minimum payments on your credit cards, etc.
Your choices in this area are going to be very personal. You might love living in a one-room efficiency downtown, or you might be living in your dream home with a mortgage that’s just right for you.
The goal, though, is to keep these costs at 50% of your take-home pay.
One way to do this is by spending your money on what’s most important to you, and spending less in areas that are less important to you. For example, someone who buys a tiny home probably cares less about having a lot of living space, and cares more being able to move their home from place to place, or spending less for a home they can own.
20% Goes to Your Savings and to Pay Off Debt
This includes building up your emergency savings, longer term savings, retirement, and making extra payments on your credit cards, student loan, car loan, or mortgage.
If you have nothing saved for emergencies, then start there, even if you have a lot of debt to pay. That way you don’t have to whip out a credit card and add more to your debt load when an emergency happens.
After you have that, then think about what will make the biggest impact for you – either paying down your debt or getting your longer term and retirement savings going.
I know a lot of advisors feel very passionately about debt vs retirement first – and there are a lot of good arguments out there on both sides – but you want to choose the one that you feel is right for you. That way you’ll stick with it.
30% for Your Wants
Boom, baby! This is the fun part. This is where you get to spend that $500 on new shoes or that new flatscreen TV.
The key here is making sure that you’ve clearly identified your needs and wants.The key to the 50-20-30 rule is making sure that you’ve clearly identified your needs and wants. Click To Tweet
Just because the TV on sale doesn’t mean it’s suddenly a need. It’s still a want.
But that’s why we have this part of the rule. Because c’mon, we’re all human. It’s a lot easier to stick to budgeting when you’re meeting your wants too.
Just make sure that what you’re buying stays within your budget, or save up for it until it does. Heck, you could even set up a separate account for your Wants, and keep putting money in there until you can buy that cool thing even without a sale. Ha! Take that, budget scrooge!
The 50-20-30 rule is a great way to get control of your personal finances. It’s also simple and easy to remember. Give it a try and see if it works for you.