The 50/30/20 rule breaks down your budget into 3 simple categories: 50% for needs, 30% for wants, 20% for savings and additional debt payments.
When you are creating your budget please ensure to use your monthly after-tax income. In other words your Net Income.
50% – of your income: Needs. Necessities are things that are non-negotiable and must be paid.
These Necessities include:
- Minimum debt/loan payments
- Child Care expenses
30% – of your income: Wants. Wants are what you spend money on that aren’t essential. This is the category where you get to choose what’s important to you.
- Monthly subscriptions
- Meals Out
20% – of your income: Savings and Debts. This is where you put money away for your short and long-term savings as well as any debt payment over and above the minimum payments.
How you use this section is depending on your current situation and the goals that you want to accomplish. Some examples are:
- Starting and growing an emergency fund
- Short-term savings for future expenses
- Short-term savings for a vacation, new car
- Long-term savings for retirement, down payment on a house