While there is no “wrong” way to save money and budget, some people find it easiest to save money when they have a system or rule to follow. The key to saving is discipline: if you’re disciplined, you’ll stay consistent. If you’re consistent, you’ll save money and have the ability to meet your own financial goals.
One such budgeting strategy is the very straightforward 50/30/20 Rule. This rule tells you what percentage of your after-tax income to spend on each type of thing you invest your money in. Read on for a breakdown of this handy rule of thumb.
Fifty Percent on Needs
Earmark fifty percent of your income for needs. That includes bills like rent or mortgage, utilities and other essential, recurring bills. If this value currently exceeds half of your income, something is wrong and your job isn’t fitting your lifestyle. If this is the case, you need to take steps to balance these scales. If that means moving to a more challenging, but higher-paging, job, then so be it.
This could also mean scaling back. Maybe your car payment is way too high for your situation. Or, maybe you’re living in a region that is far too expensive for the job you have. Trust us: make whatever changes need to happen to get your necessities back to fifty percent of your post-tax income.
Thirty Percent on Wants
Once you’ve got your needs covered with half of your after-tax income, then you can set thirty percent of that money aside for the fun stuff. This is the stuff you want to buy. Going out to a fancy dinner with your pals, buying a new smartphone, updating your wardrobe, buying video games or new movies.
Also, keep in mind that this covers your entertainment budget for things like streaming services. Don’t include these under “needs”; as great as Netflix is, you don’t need it.
Twenty Percent on Saving/Debt
That leftover twenty percent is for your debts. Or, if you’ve got no debt (great for you!) then save it. Paying your debts down in the most efficient way is, in essence, saving you money. The less time your debt has to accumulate interest, the less money it costs you over time.
Following this rule of thumb isn’t required to be financially sound and successful, but it’s a proven budget strategy that can get your finances under control and help you plan for your financial future.