By Han Huynh

ACHIEVE YOUR FINANCIAL GOALS WITH THE 50/30/20 METHOD

Having plans for a personal budget is an effective way to keep track of your spending and financial journey. Sticking to a financial budget can be complex for beginners and come with various rules, but whether you’re new to budgeting or you’re finding a method that works for you, the 50/30/20 rule can be a good choice because it is considered a simple and fundamental strategy.

WHAT IS THE 50/30/20 RULE?

The 50/30/20 rule is a budgeting technique that involves breaking up your spending into three categories: 50% to needs, 30% to wants and 20% to savings and debt payments. The rule was popularized by Elizabeth Warren and her daughter, Amelia Warren Tyagi, in the book called “All Your Worth: The Ultimate Lifetime Money Plan”.

To get a better understanding of how to apply this rule, we'll show you how it works and break down the three categories in detail.

50% NEEDS

In this system, needs are expenses that are essential for basic well-being, such as food, housing, healthcare, transportation, basic utilities and debt payments. Each person needs to identify their most important needs to spend on. Remember to try to keep your total essential expenses under 50% of your tax income. If your necessary costs take up more than half of your income, you may need to either cut costs or reduce your bills, perhaps by using public transportation to work instead of private vehicles. Cooking at home more often is another option.

30% WANTS

Wants are things that you don’t need and are not essential, but are personal preferences that make you feel comfortable in some way. Anything like leisurely shopping, vacations, subscriptions, dining out or beauty appointments could fall into this category.

People may find they overspend the most in this category because this also includes making extra upgrades from your needs section. After your essentials are purchased, it’s easy to overlook your financial goals and drop more cash on the fun stuff.

To be clear, there’s nothing wrong with spending a portion of your income on purchasing more expensive items to make your life more enjoyable – just be sure that these purchases don't cost more than 30% of your take-home pay.

20% SAVINGS

The last and smallest category is income that should be put forward to savings, debt repayments or investments. This could include long-term goals, such as preparing an emergency fund on hand in case you lose your job or meet unpredictable situations, or setting up retirement accounts to serve your financial goals down the road. Alternatively, you could allot that money into debt repayments, which include paying student loans, paying off credit card debt, or paying your housing debt.

The decision on how to allocate more money (on saving or debt payment) depends on your current circumstance. If you have no debt or your debt is a low-interest mortgage, you may want to devote the full 20% of your income to savings. In another case, if you’re paying higher interest on your loans than money you earn through savings, it may be wise to spend a higher portion on debt repayments.

The 50/30/20 method offers simplicity and is customized with percentage-based guidelines which gives you recommendations on how to manage your finances. By and large, having a financial plan offers long-term beneficiaries that not only helps you keep in track your budget but also for your future retirement. If you are a beginner and looking for straightforward strategies, sticking to the 50/30/20 rule can be your best choice.