How To Set A Realistic Budget Using The 50-20-30 Rule
Whether you're just starting out on your own or if you’re nearing retirement age, setting and keeping a budget can be a huge challenge. Many people find it overwhelming to determine how much to save each month, and since everyone’s financial circumstances are unique there’s no "one size fits all" answer.
However, many financially savvy people swear by the 50-20-30 Rule for saving. Popularized by Harvard bankruptcy expert and United States Senator Elizabeth Warren, it doesn't involve complex spreadsheets or formulas. Instead, the rule narrows saving and spending down to just three categories:
50% of your (after-tax) income should go to essentials such as living expenses. Rent, utilities, transportation, groceries, healthcare, and other necessities are included in this category.
30% of your income should be used for any "wants" such as entertainment, eating out, travel, and any of the other things you enjoy that aren’t essentials.
The remaining 20% of your income should go toward reaching your financial goals. This includes savings, such as IRA contributions and stock market investments, and debt reduction payments.
To get started with the 50-20-30 plan, take a look at your financial statements and determine exactly how much money you bring home every month after taxes. That amount is what your budget will be based on.
Next, track your spending to see how much of your money goes to everything from your morning coffee to the monthly water bill. From there, sort all of those things that you spend money on into one of the three categories. This is the time to pare down any “wants” that you might be overspending on. Remember, the final goal is to save!
This budgeting plan works well for so many people because of its flexibility and clear action steps. The 50-20-30 Rule is easy to stick with long-term, and as you see your savings grow you’ll be even more inspired to stay with the program and eventually meet your financial goals.
