What is the 50-30-20 rule?
You can divide your budget into three categories—needs, wants, and financial goals—by using the 50/30/20 general approach. It's more of a general guideline to help you create a solid financial budget than a firm rule.
The 50/30/20 Rule of Thumb: What Is It?
The 50/30/20 rule of thumb provides a simple set of principles for budget planning. According to ET, you divide your post-tax revenue among the following groups using them.
Needs 50%
You cannot, or at least not easily, live without needs. They consist of the following:
* Rent
* Groceries
* Utility costs: including water, electricity and more
Wants 30%
What you desire but do not require to survive are called wants. Among them could be:
A few examples include hobbies, travel, dining out, and digital and streaming services like Netflix and Hulu.
Financial Goals 20%
Two major topics are covered under this category:
* All investments, including retirement funds, down payment funds, and 529 college savings plans (take notice that 401(k) payments are made from pre-tax income).
* Repayment of debt
You'll need to use something else to track spending since this is only a guideline for creating your budgets, like a budget tracker like YNAB (You Need a Budget), Mint, or Quicken. The 50/30/20 percentages can then be set as targets in whichever budget tracker you like.
How to Budget Using the 50/30/20 Rule of Thumb
Most people spend more than they save, often without even realising it. The 50/30/20 rule of thumb might help you become more conscious of your spending patterns and prevent under- and overspending. You can increase your savings for the things that are important to you by spending less on the things that don't matter.
This is how it goes:
1. Determine your monthly income by totalling the funds that are deposited into your bank account each month. Find out how much is withheld if you have a workplace retirement plan, and add it to your take-home pay. Reduce your monthly income amount if you pay taxes.
2. Determine a spending cap for every category: For an optimal amount to spend on each area, multiply your take-home income by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial objectives).
3. Base your budget on the following figures: Consider these three spending areas as "buckets" that you can fill up with regular outgoings. Check to see if you are spending less than the monthly spending goals you set in the previous stage by listing and totalling your monthly expenses under all categories they belong in.
4. Stick to your budget Keep tabs on your expenditures each month and adjust as necessary to stay inside your budget moving forwarard.
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