The 50/30/20 rule may be an excellent tool for diversifying your financial profile, achieving dynamic savings objectives, and fostering overall financial wellness. The 50/30/20 rule of thumb is a money management tip that divides your budget into three categories: needs, wants, and financial objectives. It is not a hard and fast rule, but rather a basic guideline to assist you in developing a financially sensible budget.
The 50/30/20 rule of thumb is a guideline for dividing your money as follows: 50% to “needs,” 30% to “wants,” and 20% to your financial objectives.
What Is the Origin of the 50/30/20 Rule of Thumb?
Sen. Elizabeth Warren (a Harvard law professor when she invented the term) and her daughter, Amelia Warren Tyagi, popularized the 50/30/20 rule in their book All Your Worth: The Ultimate Lifetime Money Plan.
It was created as a basic guideline for working-class families to use when budgeting for the future and unanticipated occurrences.
What Does the 50/30/20 Rule Mean?
The 50/30/20 rule of thumb is a set of simple principles for budgeting. You use them to divide your after-tax revenue into the following groups.
50% to Needs
Needs include expenses that must be paid and items that are required for survival. Rent or mortgage payments, auto payments, food, insurance, health care, minimum debt payments, and utilities are examples of these. These are the “must-haves” for you. Extras such as HBO, Netflix, Starbucks, and dining out are not included in the “needs” category.
Half of your after-tax income should be sufficient to meet your requirements and responsibilities. If you spend more than that on necessities, you will have to either cut down on desires or try to reduce your lifestyle, possibly by moving to a smaller home or driving a less expensive automobile. Perhaps carpooling or using public transit to work is an option, as is cooking at home more frequently.
Needs are things that you can’t live without, or can’t live without very easily. They include the following:
Utilities like electricity, water, and sewer
Wants gets 30% of the vote.
Wants are all the things you buy that aren’t necessary. This includes outings to the movies and dinners, a new purse, athletic event tickets, vacations, the latest technological gizmo, and ultra-high-speed Internet. When it comes down to it, anything in the “wants” bucket is optional. You may work out at home instead of going to the gym, cook instead of eating out or watch sports on TV instead of purchasing game tickets.
This category also covers upgrading options such as choosing a more costly steak over a cheaper hamburger, purchasing a Mercedes over a more economical Honda, or deciding between viewing television for free via an antenna or paying for cable TV. Wants are essentially all of the small things you spend money on to make life more pleasurable and engaging.
Wants are things you want but don’t require to survive. They might include:
Digital and streaming services such as Netflix and Hulu
20% contribution to financial goals
Finally, strive to set aside 20% of your net income for savings and investments. This includes putting money into an emergency fund in a bank savings account, contributing to a mutual fund account through an IRA, and investing in the stock market. You should keep at least three months’ worth of emergency money on hand in case you lose your job or anything unexpected happens. After then, concentrate on retirement and other long-term financial objectives.
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Sarah Khan is pursuing CSE and is an author at Evolve.
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