The 50/30/20 Rule of Thumb for Budgeting

The 50/30/20 Rule
A Simple Budgeting Formula That Can Help You Build a Better Life

This strategy for financial management has been promoted by a wide range of influential people ‐‐ from TV personality and financial expert David Ramsey to Harvard professor and US Senator Elizabeth Warren. But despite the tremendous amount information and opinions available regarding this budgeting technique, the notion is actually relatively simple to understand. Let's take a quick look at exactly what 50 ‐ 20 ‐ 30 means.

The 50/30/20 plan outlines the following four steps:

  • 50% of Income Goes to Necessities. These are the basic expenses needed to sustain your lifestyle. They include simple every day costs like groceries and gas ‐‐ but this category also refers to broader month‐to‐month expenses such as rent, utilities, car payments, etc. The bottom line is that, if it's a predictable, essential expense, it should be calculated as a part of this category.

  • 20% of Income Goes to Financial Goals. What is your long‐term vision for your life? At the very least, you should be planning for retirement and for creating a rainy‐day funds. Most people also plan on some additional long‐term financial goals such as investing in some organizations that they believe in, or helping their children get a better education. Whatever the specifics may be, experts recommend setting aside one‐fifth of your income for your long‐term goals.

  • 30% of Income Is Flexible. It is generally considered wise to leave up to one third of your income for flexible expenses. Now, let us be clear that this does not necessarily refer to "disposable" income. Though disposable income is certainly included in this division of your income, you would also be wise to plan for unexpected expenses like insurance copayments, car repairs, and other bumps in the road.

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