By Dheeraj Veludandi. Edited by Arjun Chandrasekar.
The 50/30/20 budgeting rule is a way to categorize and track your after-tax income expenses into three categories: needs, wants, and savings. To form a clearer picture, 50% of your after-tax income goes to needs, 30% goes towards wants, and the other 20% is for savings. If your after-tax income is $8,000, it would be $4,000 for needs, $2,400 for wants, and $1,600 for savings. This rule has helped many people achieve their financial goals over the years and it has been popularized by Senator Elizabeth Warren’s book, All Your Worth: The Ultimate Lifetime Money Plan.
50% – Needs
Needs are anything that is necessary for you to live. These may include bills, mortgages, rent, insurance, health care, utilities, groceries, and so on. Per this rule, you have to put 50% of your after-tax income towards needs because it is what will keep you living a financially healthy life. If it seems to be that you are spending more than 50% on needs, you may need to make adjustments in your daily lifestyle in order to meet your budget. If your rent doesn’t align with your budget, maybe consider moving into a property that’s right for you and your needs. Avoid purchasing too much or unnecessary needs with the 50% in order to have an adequate amount of money for savings and wants.
30% – Wants
Wants are the exact opposite of needs. People often get confused with wants and needs so an easy way to remember is to think if the thing is absolutely necessary in order to survive. If not, it goes under the wants category. These may include things such as vacations, designer clothing, entertainment, memberships, etc. Just like needs, the 30% you have to spend under wants is all in your control. If you go over the budget you have for wants, you might have to sacrifice some of the money that you were going to save or spend for needs. But, at the end of the day, the 30% can be spent as lavishly as you wish and it is simply budgeted to make life a little bit more lively.
20% – Savings
Lastly, try to save 20% of your after-tax income by putting it in an investment account for retirement or even a savings account. You can put it in the Roth IRA, add it to an emergency fund, or even put it in the stock market. Try to use this money to pay off any debts such as credit card debt or student loan debt.
It can be said that the 50/30/20 rule of thumb makes life much easier instead of having to stress about future debt or not having enough money to make an important purchase. This budgeting rule is an efficient plan that can be applicable to all individuals and will help in assisting them with attaining financial goals while living your life to the fullest.