The 50/20/30 method is a very simple way of segmenting what you spend. You can use it to understand overspending, and also use it to begin budgeting.
Remember that when we talk about income and splitting it up using the 50/20/30 rule, we are talking about after-tax pay.
Let’s break this down…
50% (Needs)
Needs are expenses that are necessities. Some of these may include:
- Mortgage
- Car payment
- Insurances (life, health, car, home, etc)
- Utilities
- Groceries
- Required debt payments
All food is not a need – for instance, eating at a restaurant is not a NEED.
30% (Wants)
Wants are extended purchases beyond a need. So, a need might be an affordable, dependable car; a want would be a brand new BMW.
Dinners, nights out, going to the movies, hitting the ballpark for a game, taking a trip… these are all wants and go in this group. Typically, this can be thought of as the “should I get it” group.
20% (Savings)
This group includes traditional savings, as well as long-term investments, IRA contributions, 401(k) contributions, CD purchases and stocks. Savings are important for long-term emergency needs and retirement planning.
We recommend building your savings account up to 3 months or so of take home pay. This will help to keep your household running in case something happens to your job. After this is done, then focus on investing.
We also recommend creating emergency fund accounts for things like healthcare, car repairs and home repairs. Each of these can have different amounts, but if you have between $500 and $1500 in each emergency fund, along with 3 months of wages in your savings account, then you are comfortable and secure, for whatever may come.