What is the 50-30-20 rule? One particular tool that can be extremely useful in terms of those individuals who may not have the patience when it comes to tracking spending in certain categories is a tool known as the 50/30/20 rule budget.
This budget is only required whenever you need to divide and track all of your expenses into the following three categories:
Additionally, this tool is also designed to help reduce the overall amount of time that you would need to spend detailing all of your finances, thereby enabling you to spend more time concentrating on the bigger picture.
In order to determine the exact dollar amount for each of these categories, you will first need to calculate your total after-tax income. The best way to do this is to begin by looking at the take-home pay that’s listed on your paycheck. From there, add back any deduction amounts that are not taxes, such as retirement contributions and health insurance. When you have determined this amount, you will then be able to take advantage of the 50/30/20 rule budget in the following manner:
*50% of that number for your needs spending.
*30% of that number for your wants spending.
*20% of that number for all debt or savings expenditures.
For instance, take a moment and imagine that your after-tax income has been calculated as being $6,000 per month. This means that per the 50/30/20 rule budget, the following amounts would apply:
*$3,000 for needs.
*$1,800 for wants.
*$1,200 for both savings and debt.
Once you are able to successfully determine how much money you are able to spend in each category by utilizing the 50/30/20 rule budget, you will then need to determine which expenses should actually go into which specific category. This is where discretion will need to be taken. Thankfully, there are a few different guidelines that you can make note of in order to help you out.
*First and foremost, when it comes to needs spending, these are generally defined as expenses that should always be kept as part of your budget no matter what, such as utilities, housing, transportation, expenses involving healthcare, minimum debt payments, clothing, living supplies, and so forth.
*Wants spending are considered to be expenses that you choose to spend money on, even though you may not actually need them as part of your daily life. These expenses include things such as internet, cable television, dining out at your favorite restaurants, alcohol, shopping trips, various types of subscriptions, vacations, and so forth.
*Debt and savings expenditures are expenses in which you will need to set money aside either for your future or to pay off any amounts of debt that you may have quicker than you may be required to do so. Additionally, this is money that can also be used to help build up an emergency fund, as well as invest for retirement, save for a down payment on a home, and so forth.
While the 50/30/20 rule budget is a tool that may actually be great for some people, it’s important to note that whether or not it’s right for you will depend on your own specific set of circumstances. For instance, while having only three specific categories to help keep track of your finances may be a great way to prevent you from getting too bogged down in terms of categorizing expenses individually, there is also the chance that the overall lack of structure could potentially make it more difficult to find ways in which you can improve your spending habits. This means that you will need to determine what type of budgeting system is right for you – one that’s less detailed or one that’s more detailed.
Additionally, there is also the possible issue of using the rule budget itself to break down money amounts that are allocated to needs, wants, and savings/debt expenditures. This means that depending on your overall income, 50% may not actually be a big enough amount to cover all of your specific needs.
In the long run, the 50/30/20 rule budget is a great method for those individuals who may not be fans of detailed budgeting, as with only three major categories to keep track of, it essentially eliminates the need to get too highly involved as opposed to dealing with a more traditional budgeting process. On the other hand, as previously mentioned, this specific rule budget is one that won’t necessarily work for everyone due to individual circumstances; however, the rule budget itself can actually be adjusted in order to meet your particular needs, such as altering the percentage amounts in ways that will match both your financial goals and personal situation.
Thank you for visiting the Barton Harris & Co. blog, an Austin real estate firm. If you are wondering what is the 50-30-20 rule they have your real estate question answers.