4 Min Read
Budgeting is an important step to help you meet your short and long-term financial goals. But, not all budgeting strategies are one-size-fits-all, and it can be difficult to figure out which one is best for you and your financial needs. Luckily, the 50/30/20 rule is a simple budgeting strategy that you can easily configure to fit nicely into your financial picture.
How the 50/30/20 Rule Works
Popularized by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan, the rule focuses on monthly expenses, budgeting out after-tax income into three separate categories intended to fit most purchases made by individuals.
First, 50% of income goes toward needs. This category includes housing or rent payments, utilities, insurance, debt, and any other non-negotiable payments. Next, 30% of your income should go toward your wants. Under this category lives any purchases that are outside the realm of non-negotiable. This can include any monthly subscriptions, shopping sprees, extracurricular activities like movies or concerts, and so on. Finally, the last 20% of the rule will go into savings. Savings can include emergency funds, investments, or savings for a specific financial or money goal, like a down payment for a new home.
The 50-30-20 rule is similar to a budget percentage breakdown which could help you get more granular.
How to Start the 50/30/20 Budget
To determine how much money you should be dedicating to each category, you first need to figure out how much your after-tax income is.
If your primary source of income has deductions taken out by your employer, take a peek at your last few pay stubs - around two months should suffice - and determine what your average net pay is. Once you have that number, you should calculate the dollar amount times the percentage decimal to get your final dollar amount to be budgeted (net income x 0.50/0.30/0.20 = budget amount).
If your main financial source of income does not have deductions already taken out when you receive your pay, you will have to deduct taxes from the amount first before getting your final budget amount. Take a look at your state's income tax rate and, in addition to that amount, put aside about 25%-30% of the gross amount for federal taxes. Once you've deducted both federal and state taxes, you will have your after-tax income amount. From there, you can follow the same formula to determine your final budget amounts.
Example 50/30/20 budget:
– After-tax income: $1,800
– Needs: $900 (50%)
– Wants: $540 (30%)
– Savings: $360 (20%)
Something important to mention is that using this budgeting strategy may require some lifestyle changes to help you meet your desired financial goals. If you are using this method and realize that you may be living beyond your means of income, be sure to look at your financial picture as a whole to determine what items you can cut from your spending. This may mean ridding your budget of some streaming services, fewer movie nights, or any other expendable activities to help get you back on track.
Monorail can also help you set up savings goals within the mobile app, and the app will notify you of your expected completion date; this way, you know if you need to add more money to meet your goals by the date you want. There are even features for those everyday wishlist items you may want to budget for as well.
The Importance of Saving
How much should you save a month? Although the savings category has the least amount of money being dedicated to it under this rule, that is not to say that it is the least important. In reality, this is the category that may be the most crucial in meeting your overall goals.
A recommended first step is establishing an emergency fund when budgeting your savings, if you don't have one already. This fund can be used for unexpected expenses like car or house repairs. Plan to save at least $1,000 for this fund before allocating funds to other savings goals. This way, you hopefully won't have to dip into those goals if an unexpected event were to happen. Keep in mind that if you do have to pull from your emergency fund, you should begin dedicating funds to it again until you've replenished what you had to deduct.
Lastly, if you happen to have extra funds once in a while, don't be afraid to save vs pay off debt or learn how to start investing. There is no such thing as saving too much money or knocking out those loans. In fact, you could create new goals or even invest those extra funds to help you even more in the long run. The important thing is that you are saving, no matter how big or small the overall amount is.
The Bottom Line
With so many different budgeting strategies available to adopt, it may not be easy to decide which one is right for your needs. But the 50/30/20 rule is an easily modifiable strategy that can help you get started on your budgeting journey. Don't forget that not only can you save for your goals within the Monorail app, but your financial journey is only just beginning.
See how saving with Monorail works.
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