The 50/30/20 rule has been hailed as a successful blueprint for your financial wellness. If you budget using this calculation, you will be on the right path! You will also be in an elite group of people spending their income wisely. Studies have shown that the average American family spend 90 percent of their income on “wants” and “needs.”
Let’s take a closer look at the 50/30/20 rule of thumb.
First, you need to calculate your income after takes have been taking (net income). This is your starting point.
Now it’s time to focus on things you need to live your life. These are your needs, and they should account for 50 percent of your net income.
Your needs may include:
- Rent or mortgage payment
- Health insurance
- Car payments
In other words, they are things you just can’t live without. Notice this list does not include daily trips to Starbucks or new Nike workout clothes.
30 percent of your net income should be funneled into your wants. These are things that you CAN live without, such as shopping for the latest model car (carrying hefty monthly car payments!) You have choices to make in this category.
You may want to eat out at the steakhouse every weekend, but honestly, you can cook that fancy meal at home for a fraction of the cost. You can pare down the wide variety of channels on your plan and just stick with Netflix. Speaking of vehicles, you can buy a more economical car/truck. And do you really need six pairs of running shoes?
A hugely important 20 percent of your net income needs to be stashed away. This sum won’t be used for needs or wants. Instead, it’s for future needs like IRA contributions and other plans for retirement. It’s also a rainy day fund in case of financial calamity like losing your job.
Experts say your safety net should be to have six to twelve months of your living expenses in this account. This portion of your income can also be used to pay off debt, which accrues interest at lightning speed. Your debt may be credit cards, medical bills, student loans and others.
What happens when you’ve crunched and simply cannot live within the 50/30/20 budget? It may be time to find ways to earn more money. You can ask for a promotion or a raise, or launch a side hustle. There are tons of options to supplement your income! Walk dogs, clean pools, be a personal shopper or delivery person, drive Uber and Lyft. Be creative and find a niche other haven’t thought of.
If you follow this budgeting rule, you will be in the fast lane to being financially solid today, tomorrow, and into the future!