The 50/30/20 Budgeting Rule that is used to organize your flow of income and spending habits to maximize your savings. It works by learning how to allocate after all taxes and fees are deducted from your monthly paycheck. Here are the steps we recommend taking if you wish to follow the 50/30/20 rule:
Step 1: Find out your true income.
This is your after-tax income, or your monthly income with the deduction of all taxes, such as social security, state and local taxes.
Step 2: Limit your Needs to 50%. (After-tax income X .5 = Needs Allowance)
This is everything you nee to pay on a monthly basis, such as Retirement, minimum payment on credit cards and other debt, and Insurance. You can also consider other expenses that are crucial to living, such as medications and groceries a need. Don’t forget about rent and utilities.
Step 3: Limits your Wants to 30%. (After-tax income X .3 = Wants Allowance)
Date nights, shopping trips, weekend fun – this is all considered a want. Want to spend a fun weekend away? Again, all in the wants section.
Step 4: Put away the last 20% to Savings. (After-tax income X .2 = Savings Allowance)
Do you still have credit card debt after paying the minimum? Do you carry student loans? Your savings can be the buffer to help you get out of that debt. If you carry no debt, the Savings allocation should be put away for, you guessed it, savings.
One of the best pieces of financial advice we have ever gotten from a panel of Financial Advisors was to live within 80% of your average paycheck. If you successfully follow this budgeting rule, you are already following that financial advice. However, sometimes life has a way of making things difficult and following the 50/30/20 Budgeting Rule just doesn’t work with your income.
Let’s say you make the median household income of $60K. After taxes, you are looking at $3,500 a month, which can be feasible in LA with a roommate or spouse. However, let’s say you are a recent graduate making $30k, or a part-time employee. With an after-tax income of $1,900, this Budgeting Rule only allows you spend $950 on rent and all other needs. Living in big cities, like LA or New York, this isn’t possible. But as long as you are mindful of your money habits, you can work toward a financially free lifestyle.