The 50, 30, 20 Concept: Balancing necessities, wants, and savings

The 50/30/20 concept can help you balance your expenses. The rule suggests that 50% of your after-tax income should go toward essential expenses, 30% toward things you want, and 20% toward savings.

Essentials: 50%

Your essential expenses are things like rent or mortgage payments, utility bills, groceries, transportation, health care, and childcare costs. These expenses should take up no more than half of your after-tax income.

Wants: 30%

No more than 30% of your budget should go to things you love but can live without. That’s things like going out to eat, shopping trips, entertainment, and travel. This budget gives you room to enjoy life while still being responsible with your money!

Savings: 20%

The remaining 20% of your after-tax income should be saved or invested for your future. This category includes retirement savings, emergency funds, and other long-term savings goals. As a rule of thumb, try to keep at least 12 months of your gross income (income before taxes) set aside for emergencies.

Tips and tricks to make your budget stick:

  1. Don't starve your emotions

    The 50/30/20 plan encourages you to treat yourself occasionally. You shouldn’t feel like you have to deprive yourself of small luxuries like a morning latte or a can’t-miss concert. After all, if you don’t spend for too long, it can actually lead to emotional overspending.
  2. Track your spending

    The first step to creating a budget is to track your current spending. Use a spreadsheet, a budgeting app, or go old school with a pen and paper to document your monthly expenses. Be honest and include every dollar you spend.
  3. Categorize your expenses

    Next, categorize your expenses into essentials, wants, and savings. Again, use the 50/30/20 concept as a guideline, but adjust the percentages to fit your unique situation.
  4. Identify opportunities to cut expenses

    Look for areas where you can cut back on expenses, especially in the wants category. Consider alternatives to costly wants or negotiate lower rates for bills. Can you aim to do one less takeout meal per month? How about making that vacation budget stretch a bit further?
  5. Set goals

    Identify your short-term and long-term financial goals, such as paying off debt, saving for a vacation, or increasing retirement contributions. Use these goals to motivate you to stick to your budget.
  6. Making tough decisions

    Budgeting is all about getting real with yourself about your actual living expenses. If your necessities (like rent, groceries, and utilities) cost more than 50% of your income, you may need to make some sacrifices. If your rent is high compared to your income, you may need to cut back on going out or ordering in. While it can be tough to make these decisions, it’s worth it in the long run.
    Budgeting can help you reassess your living arrangements or explore new income sources so you can live more comfortably.
  7. Review and adjust your budget

    Review your budget regularly, at least once a month, to ensure you’re staying on track. Don’t be scared to get creative to make it work for you. The 50/30/20 concept is customizable, so you can shift funds from your discretionary 30% to cover the difference. Just make sure you prioritize saving that 20%!

Creating a budget may take time and effort, but the payoff is worth it. Effective budgeting will empower you to make responsible financial decisions without sacrificing your emotional well-being. And if you don’t want to start alone, reach out to a financial professional who can help guide you. Stay positive, focus on your goals, and you'll be on your way to a brighter, more secure financial future.

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