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How to Use a 50/30/20 Budgeting Rule

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How to Use a 50/30/20 Budgeting Rule

March 22, 2024

Let’s be honest, talking about money can feel a little awkward. But managing your finances effectively is crucial for your peace of mind and future security. If you're staring at your bank statement and wondering where all your money went, or if you just feel like you're constantly stressed about bills, you’re not alone. Fortunately, there's a surprisingly simple budgeting method that can make a huge difference: the 50/30/20 rule.

What is the 50/30/20 Rule?

Developed by Ramsey Solutions, this rule is a fantastic starting point for anyone looking to get a handle on their spending. It divides your after-tax income into three categories:

  • 50% – Needs: This covers absolutely essential expenses – things you have to pay for. This includes:

    • Rent or mortgage payments
    • Utilities (electricity, water, gas)
    • Groceries
    • Transportation (car payments, gas, public transport)
    • Minimum debt payments (student loans, credit cards)
    • Health insurance

  • 30% – Wants: These are the things you enjoy spending money on, but you could live without. This category includes:

    • Dining out
    • Entertainment (movies, concerts, streaming services)
    • Hobbies
    • New clothes
    • Non-essential subscriptions

  • 20% – Savings & Debt Repayment: This is where you proactively build your financial future. This should be prioritized! It includes:

    • Emergency fund (aim for 3-6 months of living expenses)
    • Retirement savings (401k, IRA)
    • Paying extra on debts (beyond the minimum)
    • Investing

How to Implement the 50/30/20 Rule:

  1. Calculate Your After-Tax Income: Figure out exactly how much money you take home after taxes and other deductions.
  2. Track Your Spending: For at least a month (ideally longer), track everything you spend. There are tons of apps (Mint, YNAB, EveryDollar) that can help with this. Or, simply use a spreadsheet.
  3. Categorize Your Spending: Based on your tracking, categorize your expenses into the 50/30/20 buckets.
  4. Adjust as Needed: The percentages are just guidelines. If you live in an expensive area, your “Needs” might be closer to 60% and you’ll need to adjust your “Wants” accordingly. The goal is to find what works for you.

Tips for Success:

  • Start Small: Don’t try to overhaul your entire financial life overnight.
  • Be Realistic: Don’t set overly restrictive goals that you’re likely to abandon.
  • Review Regularly: Check in on your budget at least once a month to see how you’re doing and make any necessary adjustments.
  • Automate Savings: Set up automatic transfers to your savings accounts to make saving effortless.

Resources:

Good luck taking control of your finances! Let us know in the comments (if you wanted to) if you’ve tried this method and what your experience has been. (Again, if you wanted to!)