A Simple Rule for Long-Term Savings
What is the 50/30/20 budget rule?
This simple, effective guideline, which has become more popular recently, can make managing your savings less stressful, and help keep your finances on track. The rule suggests dividing your (after tax) savings into three parts using that proportion 50/30/20. Spend 50% on your needs, spend 30% on your wants, and put 20% into long-term savings. This guideline is just that: a guide. You can adjust it as needed.
50% For Needs
Your needs are the expenses that “keep the lights on” and keep your life running. The necessities. Most bills fall into this category, including rent or mortgage; transportation, including car loan or lease payments; food and groceries; home, auto, health, and life insurance; medical expenses; utilities; and debt payments. Note that this doesn’t include entertainment or expenses like eating out. Some needs are not regular expenses, but may come up at some point in the future, like a new vehicle purchase, or major house repairs.
30% For Wants
Your wants include all the money you spend to make yourself happier or entertain yourself, outside of survival expenses. Non-essentials. Expenses like eating out, movies, sporting events, hobbies, vacations, or new clothes or décor that you don’t especially need to replace. There is often a fine line separating your needs and wants. It can help to list both in a responsible way, and make sure you know the difference between what you truly need, and what you simply want.
20% For Savings
Savings and investments would then receive 20% of your income. This can include a highly recommended emergency (or “rainy day”) fund, savings for eventual needs like your kids’ college, and longer-term investments like a mutual fund or IRA for retirement. While debt payments are considered needs, if you can, it’s recommended that you make extra payments or higher-than-required payments, which reduce your principle or total interest on a loan. This can be considered savings as well, since it reduces your future expenses. A great way to keep your savings growing is by automatically depositing or transferring your 20% to the right account from each paycheck. Another way to save automatically: participate in your employer’s 401K or IRA retirement plan (or start your own), especially if your employer matches any part of your deposit.
Think of this guide as flexible, and adjust it to your lifestyle, current income, and debt. As your circumstances change, you can adjust your percentages. It’s a great place to start if you’ve always wanted a simple budgeting tool.
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