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50/30/20 Budgeting Method

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50/30/20 Budgeting Method

The 50/30/20 budgeting rule is a simple framework to manage your finances by allocating your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment. This playbook outlines the steps to apply this rule along with creating a customizable financial plan.

Step 1: Calculate Income

Determine your total after-tax income. This includes your salary after taxes are deducted, as well as any other sources of income you may have, such as rental income or dividends.

Step 2: Identify Needs

List out all your essential expenses that must be covered each month. These include housing, utilities, groceries, health insurance, car payments, and any other necessary expenses that make up 50% of your income.

Step 3: Identify Wants

Identify your non-essential expenses. These are the costs for things you want but don&#x27;t necessarily need, like dining out, entertainment, gym memberships, and hobbies. These should make up 30% of your income.

Step 4: Allocate Savings

Assign 20% of your income to savings and debt repayment. This portion goes into your emergency fund, retirement accounts, investments, and paying off credit cards or loans faster than the minimum requirement.

Step 5: Customize Budget

Adjust the percentages if necessary to fit your individual situation better. For example, if you&#x27;re aggressively paying off debt or saving for a big goal, you might want to increase the allocation to savings and decrease the allocation to wants or even needs if possible.

Step 6: Implement Plan

Put the budget plan into action. Set up automatic transfers to separate accounts for savings and make a conscious effort to stick to the allocated percentages for needs and wants.

Step 7: Monitor Progress

Regularly review your budget. Track your expenses to ensure you&#x27;re staying within the set percentages, and make adjustments as your financial situation changes or you meet certain financial goals.


General Notes

Emergency Fund

Part of your 20% savings might go into building an emergency fund if you don&#x27;t already have one. Financial advisors often recommend having 3-6 months&#x27; worth of living expenses saved.

Debt Strategy

If you have high-interest debt, prioritize paying it off. You may decide to focus more of the 20% savings allocation on debt repayment before channeling money into investments.

Flexible Adjustments

Every few months, reassess your budget percentages. Your needs and wants can change over time and your budget should be flexible enough to accommodate these changes.

Goal Setting

Set clear short-term and long-term financial goals. This will help you stay motivated and give a purpose to the way you allocate your budget.