How Do I Use the 50/30/20 Rule?
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A budget is a great way to keep track of your finances and make sure you can avoid overspending. If you do not have the patience to track your expenses in detailed categories, the 50/30/20 rule can be a good tool. You only need to divide your expenses into three groups. These are needs, wants, and debt/savings. That way, you can reduce the amount of time spent tracking your money and focus on the big picture.
Putting the Rule into Practice
First, you should calculate your income after taxes. Look at your paycheck and look at the takehome pay amount. Add back every deduction except taxes. This includes retirement contributions and health insurance. The most important step is calculating how much money to put toward the three groups. Half of your income is for needs, 30 percent is for wants, and 20 percent is for savings and debt. Let’s look at an example. If your after-tax income is $6,000 each month, you would put $3,000 toward needs, $1,800 for wants, and $1,200 for debt and savings.
Placing Money in the Categories
The next step is to decide how much to place in each category. You’ll need to use your best judgment when figuring this out, but there are a few general guidelines.Needs must stay within your budget, no matter what. This includes utilities, housing, health care, and the bare minimum of food and clothing. Car expenses and minimum payments on debt should also go in this category.It is easy to mix up wants with needs. You can decide which category it goes in by thinking about whether you could live without it. If so, it is not a need.
Examples of wants include alcohol, television, subscriptions, vacations, dining out, entertainment, and gifts.The debt and savings category help you pay off loans faster or save for the future. You can build an emergency fund, invest, save for a home, and build your wealth with your savings. If you want more money to go into savings, you’ll have to pay off your debt quickly.One way to get rid of debt is by placing less money into the wants category. There are other ways as well. If you have student loans, then consolidation is a good option. This just means that you take out a new loan to pay for the old ones. You can often get a lower interest rate, allowing you to put more into savings in the long run.
How Well Does the Rule Work?
In general, the 50/30/20 rule is a good starting point when
you’re making a budget. Your specific circumstances will determine how well it
works for you. Many people find that it helps them finetune their finances.
However, the lack of structure may not work so well for others, making it
harder to improve spending habits.Your income and housing expenses may
determine how much is allocated toward each of the three categories. For example,
if your area has a high cost of living, you may have to put more than 50
percent of your income toward needs.
