The 50/20/30 Rule is the Budget to Success
I hear budget and my mind automatically goes to “aww damn I’m about to be on lockdown”.
It’s not that crazy. Like most things that are going to better your life it’s all a matter of perspective. The point of a “budget” is to better manage your lifestyle just like a “diet” is to better manage your food intake. I’m always looking for better ways to optimize my life and make better choices of course. I want to be a multi-millionaire for a long time not like those famous ball players that squanders millions within a couple years. That’s crazy!
We know better than that, right? I would hope so.
What is the 50/20/30
So what’s up with this 50/20/30 budget plan? Well it was created by U.S. Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi. They coined the phrase and used it in their book. “All Your Worth: The Ultimate Lifetime Money Plan.” So this is how it basically breaks down.
This category would be for all your essential bills. I’m talking rent/mortgage, groceries, utilities, insurance. Everything inside the 50 is considered a need. Everything under this category is essential and it’s important to be able to distinguish what is a need and what is a want. Netflix or a cup of Starbucks might be something you are used to but it’s not considered a need. So first things first is you are going to want to know what your take home is going to be monthly. For example if you are making $3000 a month. That means you have $1500 to cover all the above needs. If you are at a point in your life where your needs exceed half of your take home then you really need to make an adjustment. For most people the housing will be the biggest chunk of that 50. According to Senator Elizabeth Warren the cost for housing should not be more than 30% of your total income. So in the example of a $3000 a month income it would mean rent would not exceed $900. I live in California and that’s crazy low but in other neighborhoods you should be able to make it work. This would mean there is $600 left over for groceries and other bills.
Within the 20 we are talking about the emergency fund and savings. The 20 percent is dedicated to paying off debts such as credit cards and when that is all paid off then keep adding to savings. You can use this money to pay a little bit more than the minimum on credit cards and save some for later. The minimum requirement on a credit card would be considered a need. This is also where money can go towards investments. Stocks and other sort of investment opportunities.
In the 30 percent you will be handling your wants. Nothing too extravagant but maybe the little comforts such as your Netflix or Hulu subscription. You can use this part to eat out or save it as well for car maintenance or other wants that might not have been essential in the grand scheme of things.
With this kind of structure you should be able to get on top of all your financial responsibilities you might have while also taking care of yourself without stressing. As your money goes up you can scale up and benefit from the same structure.