Have you ever heard about the 50:30:20 rule? Well, if you haven’t then here is what this rule means.
Nowadays it is very important for any person to know how to manage their money. This means creating a budget is something that you should know.
Today is a time when every person wants to live their life in the best way. But, little do they know that in doing so they often make the wrong use of their money.
And this is exactly why you should know how to plan your budget and spend accordingly. Furthermore, if you fail to manage your money properly then it will be very difficult for you to get your financial position back on track.
This is when the 50:30:20 rule comes into play.
What Is The 50:30:20 Rule?
The 50:30:20 rule is a budget rule that aims to simply help you manage your finances in the best way. Now, this rule was initially popularized by Senator Elizabeth Warren.
She talked about this rule in her book called “All Your Worth: The Ultimate Lifetime Money Plan”. Now, this rule talks about ways through which you can divide your after-tax income. And the division is to be done in such a manner that all your needs, wants and savings are satisfied and fulfilled.
How Do You Implement This Rule?
You might be thinking that implementing this rule would be difficult? But, you can do so rather simply by just breaking the rule into three parts.
Firstly, 50% of your after-tax income will be to satisfy your needs. Secondly, 30% of the income will be used for your wants. Now, lastly, 20 of your income should be saved.
So, this way you will have a budget of your own according to your after-tax income. And, your savings and spending should be done according to this budget.
The Three Proportions of The 50:30:20 Rule
Let’s discuss the three different portions of this rule in detail.
50% For Needs
So, 50% of your after-tax income should be for your needs. Now, the needs include necessity items, like paying bills, groceries, rent, mortgages, insurance, etc.
According to this rule, 50% of your income can be used to fulfil such urgent matters. But, be sure to use as much as 50% only.
This is because of you spend more than 50% then you may have to cut down your wants or savings.
30% For Wants
Wants include those items that are not essential. These items that the ones that you aspire for. And they may include dinners and shopping, or your Netflix and Amazon Prime subscriptions.
So, basically, you can use 30% of your income on those things that make your life enjoyable.
20% For Savings
You definitely need to save a little of your income, right? So, according to the 50:30:20 rule, save 20% of your income.
Savings is a very important step or habit that you need to learn. This is because savings become help in times of emergencies or retirement.
Therefore, saving a part of your income is very necessary.
Planning your budget is a very crucial step in your life. And inculcating this habit at an early stage in your life becomes will help you a lot in your life.
So, you can try following the 50:30:20 rule to manage your after-tax income. For instance, you if find that your expense on your needs is more than 50%, then you can take measures to reduce them.
Furthermore, this rule will help you get the maximum benefit of your income as well.