If you're looking for a simple way to budget and save money each month, the 50/30/20 budget may be right up your alley. It's a practical guideline that'll make divvying up your paycheck a bit easier and allow you to save with intention. Let's dive deeper into how the 50/30/20 budget works and some money-saving tips that can help you in the long run.
What is the 50/30/20 budget?
The 50/30/20 budget is a budgeting method that helps you to divide your income into different groups so you can have more control over where your money goes. This method provides you with a plan for your finances so you always know where to put your money, and can also help you avoid overspending. Your after-tax income is divided into three categories: needs, wants, and savings or debt.
Needs: 50% of your income
Your needs are considered anything essential to you that you can't go without. With the 50/30/20 budget, you'll apply 50% of your after-tax income to go directly toward expenses like:
- Car insurance
- Phone bill
Wants: 30% of your income
Your wants are the extra expenses you spend money on but can live without. They're usually things you do regularly each month, like:
- Going out to eat at restaurants
- Gym membership
- Hair appointments
- Birthday/holiday gifts
Savings or debt: 20% of your income
Lastly, you'll allot 20% of your after-tax income to your savings or debt. Having a surefire plan for building up your savings and tackling your debt will ensure that you reach your goals faster. You can schedule your money to be automatically moved into a savings account each pay period to help you stay on track.
Some examples of savings can be:
- Emergency fund
- Down payment for a house or car
- College tuition
Examples of debt include:
- Credit card debt
- Car loans
- Personal loans
- Mortgage repayment
- Business debts
How to create the 50/30/20 budget
Here are some steps you can take to create the 50/30/20 budget:
How can the 50/30/20 budget help me save money?
The 50/30/20 budget helps you save money because it allows you to manage the income you have so that you're in control of your finances. Rather than aimlessly saving here and there, you have a plan in place to spend money on needs and wants and set aside funds for things like emergencies, vacations, and retirement. Having a financial cushion on hand is helpful in any situation that may come your way, so the earlier you start saving, the better.
The bottom line
The 50/30/20 rule is a great way to measure how much of your money you should put toward your monthly expenses. Giving your income a purpose will help you better manage your finances and build up your savings for whatever the future may hold. Saving money isn't always easy, but with the right tools and budgeting method, you can reach your goals and enjoy the reward of the work you put in.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
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