Having a budget ensures your expenses are covered and you use your money efficiently. Deciding how to allocate your money can be difficult. The 50/30/20 rule helps you divide your money.
What Is the 50/30/20 Rule?
The 50/30/20 rule is a way of allocating your after-tax income. You put 50% of your post-tax money toward needs, 30% toward wants, and 20% toward savings or extra debt payments.
Needs include things you have to pay like housing, insurance, utilities, transportation, groceries, and minimum payments on debts. Wants are things you could cut, such as entertainment, dining out, vacations, and groceries beyond the basics. Your savings category can go to debt payments beyond the minimum payments or any savings, including savings accounts, emergency funds, investments, college savings, or retirement funds.
How to Use the 50/30/20 Rule
Start with your total monthly take-home pay after all deductions are made. Multiply that number times 0.5, 0.3, and 0.2 to calculate the amount for each category. Say you take home $6,000 per month. You would have $3,000 for needs, $1,800 for wants, and $1,200 for savings. Then, assign your monthly expenses to each category.
Problems With This Method
Your income and expenses might not line up with these percentages. Some people have necessities that are more than 50% of their income, especially in cities with a high cost of living. For others, 20% isn't enough for savings. There can also be gray areas on where expenses belong. For example, basic groceries and clothing would go under needs, but a designer handbag or lobster are wants.