The Basics Of The 50/30/20 Budget
The 50/30/20 budget is a popular money management strategy. Here are the basics of the 50/30/20 budgeting method.
The 50/30/20 budget is a well-known budgeting method. It is easy to follow. Here are the basics of the 50/30/20 budget. These are the basics of the 50/30/20 budget if you are new to budgeting or just wondering how this budgeting method works.
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When you follow any budget, you want to make sure that you calculate your budget using your after-tax income. You can use a simple online calculator to calculate your income after tax. This will help you to know your final income better since taxes will tax a percentage away from your total income. After you know your final after-tax income, you can start to structure a budget around the 50/30/20 budget.
50% For Necessities
Your first fifty percent goes towards covering your necessities. These are the things that you cannot get through each month without. You must pay for these necessities to survive. A list of everyday needs that you may have that you must pay for includes:
Car loans
Transportation
Gasoline
Travel expenses
Rent or mortgage
Real estate taxes
HOA fees
Groceries
Car insurance
Life insurance
Renters insurance
Homeowners Insurance
Health insurance
Utilities (gas, heat, water, cable electricity, and Internet)
Cell phone
Childcare and school costs if you have children
Pet food and care if you have pets
Pet insurance
Personal hygiene (enough to look presentable for work and to people)
Credit card debt (make sure to pay off your credit card each month)
Note: depending on your health and personal situation, you may only pay some yearly. For example, you will not pay a car loan if you bought your car with cash. The same may be true if you do not rent or have a mortgage but purchased a house with cash.
What You Can Do If You Are Overspending On Needs
If you know you are already spending 50% or more of your after-tax income on your needs, you must reduce your lifestyle. Some simple ways to spend less on necessities could be moving to a smaller apartment or house in a less desirable part of town. You could move to a less expensive state. You could get rid of your fancier car for a simple used car. You could decide to carpool to work. You could take the bus or public transportation to get to your destinations.
You could also call to talk to your Internet provider and insurance broker to discuss lowering your monthly bill. You could start by saying that you plan to cancel your use of the provider to go to a competitor that offers a better rate.
A Note On Housing
It is recommended that whether you rent, have a mortgage, or own your home outright, that takes no more than 30% of your after-tax income. The 30% rule can help you find an apartment or house within your budget. You will then be able to continue to live below your means. The 30% rule includes the associated costs to upkeep where you live: utilities, real estate taxes, HOA fees, et cetera.
You could always decide to live in a smaller place with less square footage or a less desirable location to decrease the total amount you spend on housing. You could then use the extra money to save or invest.
30% For Wants
The second part of the budget goes towards your wants. You do not need these things to live. They make life more enjoyable. Some examples of wants include:
Clothing
Memberships
Club memberships (golf, boats, stores such as Costco, et cetera)
Gym membership
Online group memberships
Entertainment
Watching movies at the movie theater
Renting or purchasing movies to watch or stream
Going to concerts
Et cetera
Subscriptions
Going out to eat or drink
Buying a coffee or tea while you are out running errands
Purchasing alcohol (beer, wine, or liquor)
Society says you must have many things to live a good life. This is because we live in a consumeristic culture. Rather than spending money on material things, you could spend the money on wants on experiences. The reason to do this is that memories last forever. It is fleeting to chase the latest trends.
Those memories could end up helping you later on. You can connect with people by telling them about your experiences. For example, if you decide to start a website, newsletter, YouTube channel, or write a book, they can help you to connect to people in another way. People learn through stories. That is why myths and stories have been told throughout human history.
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20% You Save
The final 20% you save. Here are some ways that you can save or direct your saved money:
Basic saving account
The standard saving account with most banks continues to remain low at essentially 0% APY.
Higher-interest saving account
A higher interest rate to grow your money faster. You can find some high-interest savings accounts that pay 4% APY. The rate will vary for each financial institution.
Certificate of Deposit (CD)
For the money you do not intend to use, you could put it into a certificate of deposit. You can find CDs that pay 5% APY. The rate and amount of time will depend on the financial institution. You could use a CD to save for a longer-term purchase, such as a house.
Save money to have an emergency fund.
Having a minimum of one year’s income in an emergency fund is recommended.
Invest your money into the stock market or real estate, or start your own business.
Save for large purchases (such as a car or a house)
Save for retirement.
Save money to cover house maintenance and vehicle repairs each month.
The beauty of saving money is that you start to think long-term. You are no longer simply living for today or tomorrow. You are financially planning for your future. You are saving and investing money to help you achieve your goals. Money is a valuable tool that can help you reach specific objectives.
Ways To Keep Track Of Your Budget
You have plenty of options for deciding how you want to monitor your budget. You could use an app on your phone, computer, Internet, or cash to follow the budget. Many popular budgeting apps will have an Internet function to track your expenses along with the app. Three well-known budgeting apps are Mint, You Need A Budget (YNAB), and Goodbudget.
You could also choose to do the envelope method. This means you will pay cash for everything. You will label each of the categories that you will spend each month. You cannot spend more on a category once you have spent your money on the envelope. For example, you spent all your money driving thru to get coffee. You can no longer buy more coffee because you would exceed your budget.
You could also combine the envelope method with a budgeting software program as you become more advanced.
Adjusting The Second Parts Of The 50/30/20 Budget
You could adjust the last two parts of the budget once your 50/30/20 budget runs smoothly. You could spend less on entertainment, going out, and canceling any extra subscriptions you do not use. You will save money by focusing less on entertainment and wants. You could learn to cook your meals instead of going out to eat. You will have more money each month that you could save or invest more money by spending less of your budget on entertainment.
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Summary
The 50/30/20 budget is merely one way that you can choose to budget and manage your money. Another budgeting method is the 60/30/10 budget. You ultimately want to figure out what works for you and stick to it.
The most critical thing is to live below your means. Save your money like a squirrel gathers nuts to store for winter. Invest in yourself and your future.
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