3 November 2021
For most independent working individuals, personal finances and budget centres around their month to month decisions and how they survive. Although we live on different sources of income and needs, creating a tailored budget for your household is a good idea that helps individuals to spend their income wisely.
Also known as the 50-30-20 rule, this budgeting method is comprehensive and covers all the bases. In today’s blog, UASA explores a few tips and advantages on the 50-30-20 budget plan.
What is a 50-30-20 budget?
In its simplest form, the 50-30-20 budget rule divides your after-tax income into three distinct buckets. These buckets are:
- 50% to needs
- 30% to wants
- 20% to savings
Firstly, the budget is really simple. If you are not into details or if you are just starting, this budget is fail-safe and easy to implement. With it, you only focus on 3 buckets – needs, wants and savings and they are pretty easy to figure out. You don’t have to spend time figuring out specific categories for your finances.
Secondly, it helps you to account for every cent that you spend. You start with your after-tax income which represents 100% of what you have to work with, and then you work out the different categories from there. Lastly, it can help you save up for large expenses such as a house or car or it can help you pay down debt.
How to use the 50-30-20 rule to create your budget
Category 1: 50% – Needs
The first category is for all your basic needs. This includes things you simply cannot live without. You can include rent or house payments, health insurance, food, car payments, utilities and debt payments. You should be able to comfortably meet your needs with 50% of your after-tax income. If you are spending more than this, you may want to re-evaluate.
Category 2: 30% – Wants
Wants are all the “nice to haves” that you spend money on. These are items you don’t need in any way. Wants include things such as going out to the movies, eating out, new electronic gadgets, new handbags, and shoes, or tickets to a big game.
Category 3: 20% – Savings
Arguably the most important category for your future is the savings category. Savings in this case refers to both savings and investments. Savings can take many forms ranging from your emergency fund to your savings account. They can also include any money market investments that you have.
Investments refer to any money you have set aside to generate income. This can include investing in the stock market, purchasing real estate, or setting up your retirement accounts.
Your top priority in this category should be your emergency fund. It is important to have three to six months’ worth of living expenses saved in your emergency fund. Budgeting does not have to be difficult. The 50-30-20 budget can be a great way to get yourself ready in the world of budgeting. It can help you achieve your budget goals quickly and easily.