Improving your financial health starts with a budget. Though there are many ways to organize your spending, the 50/20/30 budget strategy is a great place to start.
This technique, also called the 50/30/20 rule, helps you organize how you spend your money. It may also give you the freedom to add more money in savings.
Best of all, this budget is simple and easy to use. You can set your monthly plan in just minutes, increasing your chances of sticking with it throughout the year.
In the School of ACE blog, we love to share tips on how to take control of your finances for a more financially stable life. Learn how the 50/20/30 budget can help you reach this goal below.
What is a 50/20/30 budget?
A 50/20/30 budget is a way to manage your spending, ensure you meet your financial needs, and consistently place money into your savings. With this budget, you’ll divide your monthly income (after taxes and deductions) into three categories: needs, wants, and savings.
You’ll put 50% of your income toward your needs, 30% toward wants, and 20% into savings.
How do I use the 50/20/30 budget rule?
To use the 50/20/30 rule budget, you will need to calculate the last few months of expenses to see where you have been spending your money. It would be best to determine where you are starting and where you need to adjust.
What qualifies as a need?
An easy way to understand the difference between wants and needs is to ask yourself, “Can I live without this item/service?” Expenses such as food, housing, and utilities are necessities, so these items fall under the need category. However, eating out is not the best way to get food on a budget, so it would qualify as a want.
Other needs may include:
- Necessary clothing
- Household items (toilet paper, paper towels, etc.)
The minimum payments required on your debt, such as credit cards or loans, are also considered needs. If you want to make a payment above the minimum amount, you will take that money from your savings category.
If your needs amount to more than half of your income, do your best to decrease your costs. Try shopping at stores with lower prices, switching to a provider that offers better rates, or even taking on extra work to increase your income.
What qualifies as a want?
Wants are any expenses that don’t fit in the needs category, such as:
- Subscriptions and memberships
- Eating out, alcohol, and other unnecessary food costs
- Upgraded necessities, such as a more expensive vehicle, or a shopping spree
If the item is something you can realistically live without, even if it makes life more comfortable, it counts as a want.
What qualifies as savings?
Though it’s labeled “savings,” this category is meant for any uses that will improve your financial future. If you don’t have any debt, for example, you can use all of the 20% for an emergency fund, savings for a home, or investments for retirement.
If you have debt, such as outstanding credit card payments, student loans, car payments, loans, or other repayments, use some of this money to pay it off faster. Just be sure to have a small amount of savings set aside for emergencies before spending more on your debts.
Ready to improve your finances in 2022? Join our challenge this month and start using the 50/20/30 budget rule!