Menu #12: How the 50/30/20 Rule Can Transform Your Budget

STATS STACK 🥞

5,260 is the new all-time high that the S&P 500 reached on speculation that the end of the most-aggressive Fed hiking cycle in a generation will keep fueling corporate profits (Source: Google Finance).

2024 (Source: Axios).

74% of American adults have a monthly budget but 84% of them say they sometimes exceed their budget. Of those who’ve ever gone over their monthly budget, 44% say they usually use a credit card to pay for additional purchases (Source: NerdWallet).

DEEP DISH 🍕

How the 50/30/20 Rule Can Transform Your Budget

Ever wondered if living in that swanky neighborhood, cruising around in a luxury car, or indulging in those high-end hobbies is within your reach? Well, there's a simple way to figure this out and keep your finances in check. It's called the 50/30/20 rule, and it's all about managing your money responsibly.

Here's the gist: Take your after-tax income and divvy it up - 50% goes to your needs, 30% to your wants, and the remaining 20% to savings, investments, or chipping away at debt. In Money Menu #2, we briefly mentioned this framework for managing your money, but let's dive deeper into each category.

Needs: 50%

Needs are your must-haves, the essentials for a decent quality of life. This includes your housing (whether it's rent or mortgage), utilities, groceries, insurance, car payments, childcare, and the minimum on your debts. These are non-negotiables. If you're spending more than half of your take-home pay on these, it might be time to rethink your lifestyle choices. For most people, housing gobbles up the biggest chunk of their budget. An effective way to cut back? Consider moving to a more affordable place or downsizing your living space, as long as it keeps your family safe and comfortable.

And about that car of yours—maybe it's time to ponder over whether you can get by with something more wallet-friendly. The goal is to have a reliable set of wheels that takes you from point A to point B without breaking the bank.

Wants: 30%

Now, this is where it gets fun. Wants are those nice-to-haves that make life a bit more pleasant. Yes, your hard-earned cash should bring you some joy! This category is all about extras like streaming subscriptions, faster internet, gym memberships, hobbies, casual shopping, eating out, and other forms of entertainment.

Ever thought about treating yourself to the premium version of something just because it makes the experience that much better? That falls into this bucket too. Remember, what counts as a 'want' can vary greatly from person to person.

Savings/Investments and Paying Off Debt: 20%

The last slice of the pie—20%—is for beefing up your savings, investing in your future, and paying down debt more aggressively. It's wise to have an emergency fund that covers 6 months of expenses, just in case life throws you a curveball like a job loss, medical emergency, or sudden repair bills. Keep this fund somewhere you can easily access it, but don't dip into it unless absolutely necessary.

Regarding retirement, it's crucial to regularly contribute to a 401K, IRA, or other retirement accounts. And while those minimum payments on your debts are considered 'needs,' any extra payments you make are actually helping you save by reducing the interest you'll owe over time.

If you're feeling ambitious about getting rid of debt, you might even consider tightening your belt on your needs and wants to free up more cash for repayments.

Closing thoughts

In a nutshell, managing your finances doesn't have to be a drag. With the 50/30/20 rule, you've got a straightforward framework to keep your financial health in tip-top shape while still enjoying the journey.

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