50/30/20 Rule

Below are the 50/30/20 rule steps to calculating your expenditures. All line items in your budget are broken into 3 categories and totalled up.  The total amount for each of those 3 categories should be 50%, 30% and 20%.

1. You start with your total monthly income.

That’s your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes, and disability taxes.

2. You aim to limit your “must-have” expenses to 50% of that after-tax figure.

“Must-haves” include all the basic expenditures you really need to make each month: outlays for housing, utilities, transportation, food, insurance, child care, tuition and minimum loan payments. If you can delay a purchase for a few months with no serious consequences — for example, clothing or dining out — it’s not a must-have. If you’re contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), it’s a must-have, at least for now.

3. Your “wants” can consume 30% of your after-tax pay.

Vacations, gifts, entertainment, clothes, eating out and other expenses are all “wants.” Some bills you pay might overlap the two categories. For example, basic phone service is a must-have. But features such as call waiting or unlimited long distance are wants. Internet access and pay television are two other expenditures that can feel like must-haves but usually are wants.

4. Savings and debt repayment make up the final 20% of your budget.

To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund. Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds.

(If you pay your credit cards in full every month, your credit card bills aren’t debt. You don’t assign the credit card payments themselves to categories; instead, you allocate each individual expenditure on the bill to its appropriate category, that’s it.)

This budget plan isn’t easy. Limiting your must-haves to 50% can be extremely tough. You may be discouraged by how far over that limit you are, but running the numbers can help you fiind areas to improve and gain control of your money.

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