The 50-30-20 budget rule outlines that you should spend up to 50% of your after-tax income on monthly needs and bills that you must pay. You should then save 20% of your after-tax income.
That leaves the remaining 30% of your income, which you can spend on items and activities that you want but don’t necessarily need.
What goes into that 50%?
The 50% needs category includes your mortgage, auto and student loan payments; utilities; insurance; health care; internet; and other monthly bills.
You should also include the costs of groceries, transportation, and any essential clothing items that you need. And don’t forget to add in the minimum monthly payment you are required to make on your credit card debt.
Basically, everything that you can’t live without falls into the 50% needs category.
What falls into the 30% category?
The 30% wants category includes anything you regularly spend money on that isn’t a necessity.
Do you eat out often? That’s a want and not a need, so it falls into the 30% slot. The same holds true for the money you spend on entertainment such as concerts, movies, and museum admission. Vacation spending falls into this category, too, as does the money you spend on streaming services or other recurring online subscriptions.
Some expenses can fall into both the “needs” and “wants” categories. Say you want a new pair of expensive athletic shoes. You don’t need them, but you’d really like them. The money you spend on these expensive shoes falls into the 30% wants category. But shoes that you need for walking around the neighborhood or for your job? The money you spend on them would instead fit into the 50% needs category. You need shoes, but you don’t need extravagant ones.
The final 20%: savings
The 50-30-20 rule suggests that you should save 20% of your after-tax income. That’s a good rule of thumb to follow. In fact, the more money you can save, the better off you’ll be financially.
Having larger savings acts as a financial safety net. If you lose your job, significant savings can tide you over until you find new work. If your car requires an expensive repair, you can rely on your savings to pay for it instead of putting this expense on a credit card with high interest rates.
Should you follow this rule?
The 50-30-20 rule is a solid financial tool if you want to cover your bills each month, build your savings, and set aside some money for fun each month. If you can follow this rule, you’ll be more financially secure.
And if you’re having trouble meeting the percentages? You might focus on cutting your spending in the 30% wants category. This might include unsubscribing from streaming services, eating out less often, or planning fewer or less-lavish vacations.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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