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No matter where you are in your financial journey, a budget is essential to ensure your success. It can help you replenish your savings after you run out of them during the pandemic, or reduce high interest credit card debt.
There are many budgeting plans with varying levels of complexity, whether you are budgeting for irregular income or following a spending plan that prioritizes saving.
But one budgeting method, the 50/20/30 rule (sometimes also written as the 50/30/20 rule), can be a simple strategy if you need help starting a budget, or if you are getting back on track. good way after a setback. .
Read on for everything you need to know about the 50/20/30 budget and if it is right for you.
What is the 50/20/30 rule?
The 50/20/30 rule was covered extensively by then professor (now Senator) Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan.
The rule divides the money into three separate brackets based on after-tax income (your take-home pay). Organizing your funds into compartments can be easier for people who are overwhelmed with more detailed budgeting methods.
Mandatory expenses represent 50% of your income. This includes mortgage or rent payments, utilities, health care, basic groceries, transportation, and child care costs.
Savings and debt repayments represent 20% of your income. This means that 20% of your take-home pay should be spent on building an emergency fund, growing your retirement savings, or paying off credit card or student loan debt.
Desires represent 30% of your income. This includes expenses like cable, internet, and phone charges (although in a society that relies on technology, you could argue that these are mandatory expenses). Overall, this category represents nonessential costs you could live without, such as eating out or shopping for new clothes.
Crunch the numbers
One of the main attractions of the 50/20/30 budget rule is its simplicity. Take the example of a person who earns $ 5,000 per month. Applying the 50/20/30 rule would give them a monthly budget of:
- 50% for mandatory expenses = $ 2,500
- 20% savings and debt repayment = $ 1,000
- 30% for discretionary needs and expenses = $ 1,500
How realistic do these percentages seem? It depends on the category. In our example, the necessities include:
- Rent payment for a one-bedroom apartment: $ 1,670
- Renters’ insurance premium: $ 15
- Auto payment and insurance: $ 570
- Grocery: $ 356
Total: $ 2,611
To determine the percentage, divide the total of the required items by the total take-home pay, then multiply by 100.
In this example, ($ 2,611 / $ 5,000) * 100 = 52.22% of take-home pay spent on mandatory expenses. This exceeds the target of 50%, but only by a small amount.
Then, savings and debt repayment should be accounted for. In our example, it is:
- Student loan payment: $ 393
- Credit card or other debt payment: $ 300
- Savings: $ 200
Total: $ 893
This corresponds to the 20% ($ 1,000) goal. However, some people with high debt may exceed the 20% target. Others may want to allocate more to their debt to pay it off faster.
Finally, “wants” can include:
- Cell phone bill: $ 100
- Streaming services (Disney +, Netflix, Spotify, etc.): $ 31
- Internet services: $ 70
- Restaurant meal: $ 400
- Purchases: $ 250
Total: $ 851
This fits well with the 30% ($ 1,500) goal.
In addition to offering simplicity, a percentage-based budget like 50/20/30 can be adjusted to meet individual situations.
Based on our example, this person might allocate some of their “wishing” funds to increase their savings or invest additional money in their student loans.
Where the 50/20/30 rule doesn’t work
While the 50/20/30 rule can be a good rule of thumb for individuals, it may be unrealistic for people with low incomes or who live in areas with a high cost of living.
Fifty thirty twenty, a project created by a graphic designer for the federal government, illustrates the difficulty of following the 50/20/30 rule on different incomes and different household sizes.
The website pulls average income data from the 2014 American Community Survey conducted by the Census (and while it’s a bit dated, it works for illustration purposes) and estimates the take-home pay of ADP Salary Calculator. And with inflation is rising to record highs, some of the costs indicated in the project are likely to be even higher for the selected families.
The website gives an example of a single adult male living on $ 35,637 a year in Chicago. This person earns $ 2,253 per month after taxes.
If he wanted to strictly follow the 50/20/30, that would be nearly impossible as his costs for housing, utilities and health care would amount to well over 50% of his take-home pay.
Credit: Fifty thirty twenty
Another example is a married couple in Boise, Idaho with two children. This family earns $ 72,104 per year and earns $ 4,482 per month after taxes.
Since their needs represent over 71% of their take-home pay, this family is also unable to follow the 50/20/30 rule. For them, budget breakers are their health costs ($ 719, according to the Economic Policy Institute (EPI) Family Budget Calculator) and child care costs ($ 887, also according to the PPE calculator).
Credit: Fifty thirty twenty
How to use the 50/20/30 rule to your advantage
This method of budgeting is a good way to get into the habit of making savings and debt repayments part of a budget.
However, following the compartment allocation percentages to exact amounts may not be realistic, depending on your income and the cost of your necessities.
This is not to say that this method of budgeting is not useful. Using the amounts in the compartments as a starting point can help you identify where you are overspending. You may realize that you are overspending on subscriptions or eating out and using that information to make adjustments.
If you use the 50/20/30 rule as your budgeting method, you can simplify it further by tracking your spending on a budgeting app and automate your savings. Mint, for example, logs into the user’s bank account and allows the user to create budgets and track upcoming invoices.
After planning how much you plan to spend on necessities, savings / debt, and wants, tracking in an app that works for you can help you better visualize your spending and savings.
To simplify saving, most verify accounts allow users to set up recurring transactions on a specific date each month.
Most experts will tell you that budgets need to be flexible to help them work and make sure they’re on track. But it doesn’t matter if you go for the 50/20/30 rule or some other method of budgeting, one thing’s for sure: Getting a feel for your cash flow and adjusting your spending based on your long-term goals can set you up for the job. financial success.