The 50/20/30 rule — spend 50 percent of your income on needs, 20 percent on savings and debt, and 30 percent on wants — is a simple way to think about using a basic budget to get a handle on your finances.
Needs: 50 percent
Start your simple budget with needs.
Spend about half your money on the things you must have to survive. Food, clothing, shelter, and transportation are the most common basics people think of, but you can break down these categories into more specific costs.
For food, you may include groceries, ready-to-eat meals, and modest takeout purchases. Your clothing budget should cover both workwear and seasonal wear. For shelter, you may have rent or a mortgage, home insurance, property taxes, utilities, and phone charges.
To help you get around town, you might have car payments, gas costs, car insurance, parking fees, or public transportation fares.
Minimum payments on debt belong in this category so you don’t dig yourself further into the red.
Savings and debt: 20 percent
Set aside one-fifth of your income for savings and debt payment. Savings are important because one day you might need emergency funds to pay for a home repair or medical expenses.
You must also think about including your long-term future in your simple . You may start a family and later want to send your children to college (using, for example, a 529 plan).
As you age, you should ensure you have adequate money to live on once you retire.
In addition, you might have accumulated some debt. While the minimum payments on that debt qualify as a need (see above), you should also work toward whittling down that debt by paying more than the minimum amount each month.
Wants: 30 percent
Allocate 30 percent of your income for things that give you pleasure. Have dinner at that great new restaurant, buy those shoes you’ve been drooling over, or book that holiday.
Your basic budget can include a bit of money for additional investments or a donation to your favorite charity.
Some people overspend on this category, of course, and that’s an easy way to end up in debt. However, the inverse is true as well — don’t be too stingy with yourself. Allow yourself to live a little.
Earning an income is at least partly about creating a life that gives you joy!
Getting the mix right
Wrangling your income and expenses into the 50/20/30 rule might take time.
A spreadsheet could help you keep tabs on your spending. For example, check out Microsoft’s free budgeting templates.
Secondly, your first attempt at allocating your money into needs, wants, and savings might not precisely match the percentages of the 50/20/30 rule. If so, don’t worry. Get the numbers as close as you can, then reassess the mix after six months. Then continue to reassess until you are satisfied with your basic budget.
The 50/20/30 rule is meant to make your money work for you, now and in the future. Get a handle on your finances now with this basic budget, and the future will take care of itself.