What is the 50/30/20 rule?

Most financial experts say that everyone should use the 50, 30, 20 rule to stay money wise.  The 50/30/20 rule involves needs, wants and savings.  While most would agree with the basic concepts, the problem is putting spending in the different categories  Let discuss the categories and then discuss how actually works.

Needs

Needs are suppose to be items, in which you have to have.  These items are the basic needs of everyone.  Shelter.  Your primary residence cost.  Rent or mortgage payment.  Bills associated with your shelter.  Electric, gas, water, and trash. Notice the internet, cable, streaming, and phone are not included.  We will discuss them a little later. Food.  Cost of groceries, not going to your local restaurant or fast food joint.  Again we will discuss this a little later.  Transportation is a need.  Auto payment, insurance and gas.  Again notice no mention of repairs is included in needs categories.

Needs are basic items to survive.  Housing, food, and transportation.

Wants

Wants are more than shopping or going out to eat.  Wants are items, which would be nice to have.  However most wants deal with conveniences.  It is convenient to have internet in our house.  It is convenient to have a cell phone.  It is convenient to go out to eat, but we could go to our local library, and jump on their internet for free.  Many of us remember the days of no cell phones, and we survived.

Wants really make our lives very convenient. Some view wants as expectations for working hard, and while not against self incentives.  Be careful especially when goals are not achieved.

Savings

Saving is a vehicle to put money aside for a rainy day.  Auto and/or home repairs. Vacation.  Filling in the gaps, when income does not cover needs (notice I did not say wants). Retirement.

50/30/20 Rule

Now that we have familiarize ourselves with the terms needs, wants and saving.  The 50/30/20 rule is very simple.  All post tax income should be broken down in three categories.  50% of your income should be set aside for needs.  30% of your income should be set aside for wants.  20% of your income should be set aside for savings.

Most use the 80/20 rule.  80% goes toward my lifestyle and 20% toward saving.  Issue with that is when the 80% can not meet your needs…how do you break it down to what is important?  Most just pay what is due first and find themselves in trouble with rent or mortgage…food…and auto payment.  You pay your internet bill, but have no food to feed yourselves.  That is why need and wants should be established.

Image courtesy of Sabine Peters.

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