So, you’ve finally had it with your debt, and you’ve decided to do something about it. Not only do you want to get rid of it, but you want to stay debt free. Alas, you’ve tried budgeting before but found it tedious and unrealistic. What you need is a budgeting plan that covers your needs and allows room for “fun” as well as for savings and investments. Well, it sounds like a money management rule known as 50/30/20 is the strategy for you. Keep reading to learn more.
What is a 50/30/20 Rule Budget?
It’s a straightforward and sustainable budgeting strategy that can help you manage your cash more effectively. You simply divide your net income into three spending segments: 50% of your money for needs, 30% for wants, and 20% for savings or investments.
Why is the Rule Beneficial?
Because you have just three key categories to track, there’s no need to get into nuances every time you spend, or to log every transaction. By making sure your expenditures are balanced across these primary spending classifications, you can make your cash work better and more efficiently.
Adopting the monthly 50/30/20 rule is an effective way to incorporate more structure into your spending habits, rendering it easier to meet your financial objectives.
How Did the Rule Come About?
The 50/30/20 money management rule is from the 2005 book “All Your Worth: The Ultimate Lifetime Money Plan” by U.S. Senator Elizabeth Warren along with her daughter, Amelia Warren Tyagi. The strategy was based on 20 years of research.
There’s certainly a need for such a rule. In the first quarter of this year, for example, consumer debt increased by $266 billion to $15.84 trillion. This is $1.7 trillion more than pre-pandemic levels. Add that to soaring inflation and increasing interest rates that make it more expensive to borrow.
How Does the Rule Work?
50% Goes to Needs
These are necessary expenses such as mortgage or rent payments, utilities, car payments, healthcare, and insurance. You should only require half your net income for these needs and obligations, which also include minimum payments on bills. It’s good money management advice for California residents who are awash in debt in a state with one of the highest costs of living. You can learn more about this at www.FreedomDebtRelief.com.
If you find that your needs call for more than 50% of your after-tax income, you must either cut out some of your wants or downsize how you live. Maybe you need a smaller home, more modest vehicle, or less dining out.
30% Goes to Wants
These are non-essential expenditures. The category can include everything from restaurant meals and movies with friends to technological toys and vacations abroad. Of course, everything in this category is optional. By that, we mean that you can cook more at home, view movies on TV, forego the latest gadgets, and go on holiday closer to home.
20% Goes to Savings and Investments
Aim to build an emergency fund of at least three months’ living expenses so that you don’t go into more debt should the unforeseen occur. After you’ve done that, concentrate on retirement and other financial goals. Consider an IRA account or stock market investments.
Debt repayment is also in play here. Yes, minimum debt payments fall under needs, but any additional payments you make that shrink the principal and the amount of future interest owed are considered savings.
Note that if there’s an occasion for you to deplete your emergency fund, the initial allocation of additional income should go toward fund replenishment.
Ultimately, most people find budgeting and saving challenging. Knowing how the 50-30-20 money management rule works, then applying that knowledge to your finances, can get you on track and keep you there. If you’re overwhelmed with credit card or other unsecured debt, you may need to employ debt settlement. We recommend Freedom Debt Relief, a reputable, accredited company with many years of experience.