Helpful Budgeting Hack: How to Apply the 50/30/20 Rule
Without a budget, getting a handle on your spending can be a very tricky task. But even if you are recording your expenses regularly, you need a system to truly understand where your money is going in order to create smarter spending habits. With the simple budgeting method known as the 50/30/20 rule, you can do just that — and take control of your financial future.
What is the 50/30/20 Rule?
Budgeting doesn’t have to be complicated, tedious, or impossible to understand. It can be as simple as the 50/30/20 rule. This popular rule breaks your monthly net pay into three categories: 50% for needs, 30% for wants, and 20% for financial goals.
Your net pay refers to your after-income tax, so any deductions for health insurance, 401 (k) contributions, or other automatic payments taken from your salary shouldn’t be included in your gross (or before-tax) income. While the actual allocations in each of these categories can bend a bit, the goal is to stick to it as closely as possible in order to always know where your money is going and be able to better manage it.
This easy rule can make budgeting more simple and easier to maintain. So let’s take a closer look at these categories to better understand how to allot your money accordingly.
50% of Your Income: Needs
According to the 50/30/20 Rule, half of your after-tax income should be allocated for your needs, or what you would consider essentials. That means expenses you cannot avoid, whether on a regular basis or in the case of emergencies, e.g., car repairs or utility replacements (no, an insatiable ice cream craving doesn’t count). Needs are defined as necessities, such as:
Minimum Debt Payments
Try to keep this category limited to things that you can’t live without, making sure to keep some cushion for things you cannot control, and you’ll be on track to build a financially sound budget.
30% of Your Income: Wants
Differentiating between wants and needs isn’t always easy. But wants should be considered the things you can live without, but you simply don’t want to — and feel that you shouldn’t have to. Items in this category are those you’re willing to spend monthly money on in order to create the quality of life you desire without breaking your budget.
For example, wants may include vacations, streaming subscriptions or entertainment services, and dining out. Anything that you buy on a regular basis that aren’t essential to living and working should be put in this category. But in following this rule, make sure this total doesn’t exceed 30% of your budget to help you stay the course.
20% of Your Income: Goals
If you’ve been considering starting an emergency fund, paying off your credit cards or loans, or building a substantial savings account, this is the part of your budget that’ll be dedicated to that. Other financial goals like investing, saving for retirement, or tackling high-interest debt of any kind will come from this 20% if you’re following the 50/30/20 rule.
This 20% should be devoted to helping you prepare for the future, such as saving for a house or creating a college fund. That way, you can move towards your financial goals with a plan and confidence versus wondering if and when they’ll actually be possible.
How the 50/30/20 Rule Helps You Budget
Without a helpful guideline for budgeting your money, it becomes a lot easier to spend too much and save too little. This easy budgeting hack allows you to keep your expenses prioritized and allocate appropriately to benefit you the most now and in the future. With the balance that this rule provides, you’ll have everything you need and still actively work towards your ideal financial future.
Remember: It’s a Guideline, Not a Guarantee
It’s important to note that this budgeting hack won’t work perfectly for everyone. It also doesn’t help you track your budget, but instead, simply plan for it. Take note of these potential gray areas to help you recognize where this rule should be taken with a grain of salt!
Groceries: Need vs. Want
While dining at restaurants and ordering takeout have been defined within the want category, groceries can be a bit trickier to interpret. For example, you may buy everything you need as far as meals go for the week, but what about that certain carton of ice cream you don’t need, but really enjoy. If you’re lumping your entire receipt as needs, it’s easy to miscategorize certain items. Breaking down your shopping trips on a more granular level can help you stay on track with your budgeting goals.
When Needs Outweigh 50%
Especially in an economic climate like today, 50% may not be enough to cover everything in your needs category. When this is the case, percentages can be altered to accommodate a realistic and manageable budget that works for your unique financial situation.
When Financial Goals Take Precedent
If 20% of your budget seems like it’ll slow you down in terms of reaching your financial goals, you can — and should — personalize this rule to you! If you want to buy a house within the year or know that a little extra savings will help you reach your retirement goals on your timeline, you may want to allot more than 20% to this category. K Wealth Advisors can help you figure out what exactly that may look like for you and how to best adjust for your unique goals.
Is the 50/30/20 Rule Right for You?
Once you have your after-tax income, do some math to get an idea of what these percentages look like for your specific budget. Do you think these allocations seem realistic for your spending? Are you willing to make changes to your habits that would make it work? If it suits your financial situation and helps you budget, it’s one of the easiest ways to stay on top of your finances and reach your financial goals.
If you’re interested in learning more about getting started, reach out to K Wealth Advisors for guidance on how to best plan your budget and get on track for financial freedom. We can help you schedule a GoodFit meeting,and discuss your goals and options today. #KWA