US Senator Elizabeth Warren emphasized the 50/30/20 budget rule in her popular book “The Ultimate Lifetime Money Plan.” This rule helps you split your net income into three groups of spending. We will discuss these groups in this article. Stick around to learn more.
Group 1: 50% Must be Set Aside to Cover Needs
All the necessary bills you must pay to survive fall under this group. Financial advisors recommend you use 50% of your net earnings to cover these bills. If you find yourself spending more to pay for your needs, then you’ll have to cut down the budget for your wants. Some of the needs you can pay with 50% of your net salary include rent, groceries, loan repayments, health insurance, electricity, and water bills.
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Group 2: 30% Should be Spent on Wants
Items that fall under group 2 are not essential. They are things that make your life enjoyable, but you can actually live without them. For instance, you can choose to pay for a ticket to a sporting event even though it is possible to watch it on your TV. Financial advisors say you must never spend over 30% of your income on such things.
Group 3: 20% Should Go to Your Savings Account
It is recommended that you have enough savings to cover your needs for at least three months in the event you lose your job. You can achieve this by saving 20% of your monthly net salary. Some of the ways to save include setting up an emergency fund, investing in financial markets, and opening a mutual fund account to make IRA contributions.
What Are the Benefits of 50/30/20 Budget Rule?
Ease of use – This rule provides a simple framework for creating a budget. It allows you to plan how you will spend your monthly income without applying complex calculations.
Better money management – If you apply the 50/30/20 rule, there is a high possibility that you will manage your funds appropriately.
Prioritization of essential expenses – By understanding how much money goes towards covering your needs every month, you may not have to borrow more funds to settle your bills. Instead, you can minimize funds spent on wants.
Long-term financial security – By saving 20% of your monthly salary, you can accumulate enough money to meet your long-term financial goals.
How Do You Adopt 50/30/30 Budget Rule?
Here are some tips you can use to adopt the 50/30/20 budget rule:
Always Track Your Expenses
You need to monitor your expenses for at least two months to understand your spending behavior. Assess your spending to see if you are adhering to the 50/30/20 budget rule and make changes when necessary.
Understand Your Net Income
Do not formulate a budget using your gross salary because that’s not the amount that reaches your bank. Instead, you should budget with your net income. This will help you come up with the correct figures for each category (needs, wants, and savings).
Identify Your Essential Costs
As mentioned earlier, essential costs are all non-negotiable expenses you must settle to survive. In most cases, they account for a huge percentage of your monthly budget. So, you need to identify and pay them before spending a dollar on anything else.
Automate Your Savings
If possible, after you determine how much you are supposed to save using the 50/30/20 rule, you can automate payments from your bank account to a savings or investment account.
For the 50/30/20 budget rule to work, you need to follow it more consistently. Resist any desire to spend more than your budget allocation.
Is Modifying the 50/30/20 Budget Rule recommended?
Yes! It is okay to adjust the percentages in the budget rule to suit your specific financial goals.
If well applied, the 50/30/20 budget rule can help you become a better money manager. You will be able to meet unexpected expenses without going into debt. Moreover, this rule makes your long-term financial goals achievable.