WHAT IS THE 50-30-20 RULE?
Creating a budget is s useful method for meeting financial goals, but it can be overwhelming where to begin. The 50-30-20 rule has gained popularity among young adults in recent months, so let’s dive into what exactly it entails.
As a disclaimer, everyone has different incomes and life circumstances, so it’s impossible that one budgeting strategy works for everyone. This is just an overview of one budgeting technique you can choose from.
The 50-30-20 Rule
The 50-30-20 rule is a budgeting strategy created by Senator Elizabeth Warren, to help individuals effectively construct a budget and stick to it. The rule breaks up your after-tax income into three categories: 50% to needs, 30% to wants, and 20% to savings.
50% for Necessities
Necessities are the expenses that you are obligated to pay along with those that are necessary for your survival. The following are necessary expenses:
Rent or Mortgage Payments
Car Payments
Groceries
Insurance
Health Care
Minimum Debt Payments
Any additional expenses that are not absolutely necessary for your survival will fall into the next category, wants.
30% to Wants
“Wants” are any purchases that are not absolutely essential. Everything from your Netflix subscription to your weekend getaway would fall into this category, along with these other common expenses:
Sporting events or concerts
Dinners out
Starbucks runs (my weakness!)
Gym memberships
Cable or cell phone plan
Gifts
At the end of the day, all these expenses are optional, so it’s important to be intentional about which ones you want to fit into your 30%.
20% to Savings
Finally, try to allocate at least 20% of your after-tax income into savings or investments. Saving a significant portion of your income can set you up nicely to meet financial goals and provide peace of mind in case of an emergency. The following are methods of saving:
Build an emergency fund in a high-yield savings account
Make IRA (Individual Retirement Account) contributions
Invest in the stock market
Make extra payments to pay off debt
Other financial goals (house, car, trips, etc.)
The Bottom Line
Designing a budget that fits your lifestyle and goals is the most important thing you can do to set yourself up for success. The 50-30-20 rule is among the most popular, but everyone has unique circumstances, so make sure to find a budget that works for you.
Additionally, there are many tools out there designed to help you understand where you spend your money and how to create a budget. I personally use the Rocket Money app to track my expenses - I love it because it sends me a notification when I’m getting near my budget in a certain category!
