A quick Google search will tell you there’s no shortage of budgeting formulas, software, apps, and calculators. But choosing the one that works for you is enough to make your head spin. That’s why we recommend starting with the popular 50/30/20 rule. Explore how this simple formula allows you to create a realistic budget by establishing sustainable spending parameters in three major categories.
What Is The 50/30/20 Rule & How Does It Work?
The 50/30/20 method splits your monthly after-tax income into three categories: needs, wants, and savings/debts. According to this method, you should spend 50% of your income on necessities, 30% on wants, and 20% on savings or paying off debt. To see how your monthly take-home pay divides, plug it into this handy calculator.
Next, you’ll want to establish how much you’re actually spending in these categories each month. A good way to do this is to view at least three months of bank statements so that you can categorize and add up the following expenses:
Now, you can compare what you’re currently spending in each category to the ideal amounts calculated using the 50/30/30 rule. Doing this lets you see if you’re on the right track or need to make adjustments.
How Does The 50/30/20 Rule Affect Your Budget?
Financial gurus often recommend this method because it shows you where your money is going. It also allows you to create achievable goals.
With that in mind, it’s important to look at your 50/30/20 rule results as a loose framework that you can customize to fit your circumstances. For example, 50% may not be a realistic goal for your needs category if you live in a popular city like Delaware, where the cost of living trends above the national average. So a logical adjustment would be to decrease spending in wants and savings until your income increases, or you find more affordable housing. That’s just one demonstration of how this method’s flexibility can work for you.
Explore DEXSTA Federal Credit Union’s Financial Literacy Courses
When it comes to finances, knowledge is power. That’s why we offer our members fun and easy financial literacy courses through Banzai. Learn about money hacks like the 50/30/20 rule and more without ever leaving the comfort of your home. Visit our website for more resources and discover how DEXSTA makes banking simple.