This rule says your monthly income and spending should fall into three categories, with 50 percent of your income going toward needs, 30 percent going toward wants and 20 percent going toward savings and debt.
How does it work?
No more than 50 percent of your after-tax income should go into the “needs” category. This includes food, housing, health care and other similar items. These are the things you absolutely can’t live without. If your needs list accounts for over half of your paycheck, adjustments and cutbacks may be needed.
The “wants” category includes things you do not necessarily need but those that make you happy. This category might include events, dining, gym memberships, home improvements and vacations. If your wants seem to exceed 30 percent each month, then prioritizing and planning should be done.
The “savings and debt” category is the 20 percent of your paycheck that you should put toward savings and debt. If you have student loans and credit cards, those fall into this category. You should get debt paid off so that more and more of the 20 percent can be placed into your savings or emergency fund.
How do you apply it?
The 50/30/20 rule may sound simple, but in fact, it takes some calculating. First, you need to understand what your after-tax income is each month. It is best to look at your pay stub to make note of any contributions that are automatically going into retirement accounts. This retirement savings contribution is considered part of the 20 percent.
Then, calculate the amount you can spend for each category by splitting the total into 50, 30 and 20 percent. It will be helpful to check through your past purchases for full awareness of where your money has been going to help plan your spending under the rule.
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Is it right for everyone?
While the 50/30/20 rule is a good rule of thumb and starting point for many, it may not be an ideal fit for everyone. It also may not be possible. For those making lower salaries, housing alone, which is highly important, could take up the 50 percent.
The rule also does not really account for interest, inflation and other factors. Using a budgeting system for financial obligations and planning for future spending is most important.
If you would like to have your current financial plan reviewed, or if you are looking for a new financial plan, schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing firstname.lastname@example.org.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.