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What Is the 50/20/30 Budget Rule?
The 50-20-30 rule
It is a budget rule to help people reach their financial goals. It states that:
- You should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do.
- The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.
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The 50-20-30 rule
It is a budget rule to help people reach their financial goals. It states that:
- You should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do.
- The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.
Needs, wants and savings
- Needs: these are those bills that you absolutely must pay and are the things necessary for survival (rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities).
- Wants: these include all the things you spend money on that are not absolutely essential (dinner and movies out, vacations, electronic gadgets, etc.)
- Savings: this includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market.
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The 50/20/30 budgeting method
With the 50/20/30 budgeting method:
- 50% of your monthly spending goes toward essentials - your home, your food, etc.
- 20% of your monthly spending ...
Debt payments
Debt payments may look confusing when you add it to the savings column. But the easiest way to build up a savings balance is not to have your money go toward debt. Once your debt is paid off, you can increase the savings.
Reducing your essentials
Play around with your monthly budget to see where you can reduce your monthly spending:
- You could contact your internet company to get a discount.
- You can clip coupons and use rebate apps to spend less on your monthly groceries.
- You could set aside less for medical expenses if you have an emergency fund.
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Key Ideas
Budgeting = creating a plan to spend your money
Budgeting is simply balancing your expenses with your income.
It's a plan for the coordination of resources and expenditures. When you budget your money, there’s a desir...
How to create a budget
- Gather Some Financial Information: gather a detailed list of your income and expenses.
- Select a Budgeting Method: figure out how you’ll budget your money to meet your most pressing financial goals.
- Create Your Budget: tally up all your expenses and income to see where you stand and allocate expenses.
- Execute Your Plan: you can use a notebook, pen and paper, a spreadsheet or an online software.
- Reward Yourself: you can work a small percentage into your budget to treat yourself each month.
The 70:20:10 budgeting method
This method suggests that you allocate 70 percent of your income to expenses, 20 percent to savings, and the remaining 10 percent to debt.
70:20:10 may work for someone with a healthy emergency fund and minimal debt.
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The zero-sum budget
Using this method forces you to “spend” every dollar that you make, by allocating all of your earnings into the different categories that your finances require.
It prevents waste and m...
Steps of the zero-sum budget
- Determine how much you make on any given month.
- List your bills: Once you determine how much money you'll make this month, figure out how much money you need to spend next month.
- Compare and contrast: Once you see your monthly income and your monthly bills on paper, a clear picture of how much money is left over emerges.
- Spend all of your money on paper: decide where that money will serve you best.
- Track your spending.
- Make adjustments to get it right.