The 50-20-30 Rule: A Simple Budget Solution
Making a budget and saving for the future can be tricky. According to a 2013 Gallup poll, only 1 in 3 Americans are on a budget, which may explain why a 2016 survey found that only 1 in 3 Americans have $1,000 in the bank for a rainy day. While budgets have become slightly more popular in the past couple years, the fact remains that most Americans still aren’t budgeting their finances.
And I get it. Keeping a budget can be a lot of extra work, and having to track every dollar you spend can be enough to make you want to abandon the idea of budgeting at all. But that would be a mistake.
That’s one big advantage of the 50-20-30 Rule, a simplified budget guideline that’s easy to follow without much hassle. First, calculate your post-tax income. Then, break it into three categories:
- 50% should be set aside for living expenses, which includes everything from your rent and utilities to insurance, loan payments, and groceries. If you have to pay it to keep living as you are, it’s a living expense.
- 20% should be placed into savings. If you already have a solid rainy-day fund in your savings account, consider long-term savings like a 401(k) or a Roth IRA. Conversely, if you have any outstanding debts, paying down a mortgage or auto loan can be an effective way to save money for the future.
- The remaining 30% is now your money to use however you like. Weekly sushi dinners, big European vacation, Netflix subscription, new clothes, as long as it doesn’t exceed 30%.
Obviously, these numbers are loose guidelines, and can be adjusted to fit your particular situation. If you need 60% of your income to cover living expenses, then your discretionary income should only be 20%. Or if you can put more than 20% into savings and paying down debt, go for it. The important thing is that the 50-20-30 Rule provides a simple framework for budgeting your money, without forcing you to track every dollar.
This makes it an excellent starting point for people new to budgeting—as well as a great big picture reminder for those who do track every dollar. After all, the whole purpose of a budget is to make sure you can afford what you need, and know when you can buy what you want.
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