Many people often strive with poor money management practices in their daily lives and experience a host of dilemmas making their lives overwhelmed. Under such circumstances, pursuing 50/30/20, the golden rule of budgeting is a great option to get back their upset financial situation on track, says Scott Tominaga. The fundamental notion behind this popular rule is to determine one’s after-tax income and then divide it in a manner so that all their needs, wants and savings are found justifying and enabling to make the financial position orderly. In this article, Tominaga offers an overall insight into this rule and how individuals can adopt it in their daily lives.
Understanding the Rule
Adopting the rule is very simple. It requires individuals to break down their take-home salary and use it in three distinct manners. 50% of the net income should be used to meet needs, 30% towards wants and the remaining 20% should go to savings and investment. Following the practice will help them stay within the limits for everything while installing a sense of discipline and equally ensuring neither they need to compromise on their quality of living nor worry about reaching their short and long-term financial goals. For a better understanding of how they should categorize their spending limits within needs, wants, and savings.
50%: Needs
Needs refer to the things that are crucial for survival as well as bills that individuals must pay off. Half of the net income should be accounted for meeting such needs and obligations. Those spending more than their needs, are thereby required to either trim down cut on ‘wants’ or minimize their lifestyle – for instance moving to a smaller home or opting for public transportation rather than riding a car, etc. Here is a list of needs
- Rental of home of mortgage payments
- Groceries
- Utilities
- Insurance and health care
- Minimum debt payments
30%: Wants
‘Wants’ involve things on which individuals spend money although they are not categorically essential. Precisely, things that come under the ‘wants’ category are, in essence, optional and can be shortened or compromised, says Scott Tominaga. For instance, considering to work out at home rather than hitting a gym center. Instead of dining out, cook at home.
However, due to poor money management, most people act reversely, such as investing in a BMW rather than a more reasonable Honda, using AC rather than air coolers, or watching cable TV, rather than opting for television free of cost. To be precise-‘ wants’ involve all the little extras on which people spend money to make their life most comfortable, and entertaining.
A list of things that come under Wants
- Spending on unwanted trendy clothes, costly handbags, watches and jewelry
- Going on Vacations
- Using costly smartphones like Apple etc.
20%: Savings
Do your best to keep aside 20% of net income for savings and investing. For instance, individuals should have an emergency fund equivalent to a minimum of 3 months of salary to face an emergency like job loss, or loss in venture. Moreover, make sure to consider retirement funds, etc. Examples of saving include
- Having an emergency fund
- Contribute to mutual fund and IRA
- Making a fund for investing in property
- Paying more than minimum debt repayments
The 50-30-20 rule is aimed at assisting individuals in managing their after-tax income or take-home salary in a disciplined way while prioritizing savings and investments like emergency funds, retirement savings, etc. Make sure to follow the rules strictly and with diligence to avoid falling into a debt trap and enjoy a financially stable life.
