If you have trouble budgeting your income from month to month, you are not alone. According to a Gallup poll, only about 32% of Americans maintain a household budget. If you’re part of that 68% and need help planning your finances, the 50-30-20 rule may be your solution.
The 50-30-20 rule states that 50% of your monthly income should go to needs, 30% to wants, and 20% to savings. To start budgeting using this rule, you first need to determine your after-tax income each month. This is done by looking at your paycheck stub and adding any deductions that are not taxes. That can include items like health insurance and 401K contributions. Then you must divide that amount into your needs, wants, and savings.
First, let’s look at needs. These can include:
- Mortgage payments
- Car payments
- Groceries
- Utilities
- Insurance
Ideally, no more than half of your income should be allocated to needs. However, it could be that in your current situation, more than 50% of your income goes to needs—which is okay. Taking the time to look at your finances this way might allow you to see where making adjustments, like refinancing your home, might allow you to keep more of your income for wants and savings.
Here are some examples of some wants:
- Tickets to concerts or sporting events
- Dining out
- Premium TV channels
- Vacations
You may need to cut back if your monthly expenses exceed 30% of your income. Eat out less, subscribe to fewer premium channels, or take a vacation closer to home.
Finally, here are some savings examples:
- Savings, CD, or money market account
- IRA or 401K contributions
- Stock market investments
- College fund
The savings contributions can vary by stage in life (young people adding more to a college fund, seniors to a retirement fund), but no less than 20% should be put into savings regardless of age.
Proper budgeting using the 50-30-20 rule can lead to paying off debt sooner, ensuring you have money for the things you need, and saving for important things. And it's never too early to start learning to budget. Check out NASB’s 50-30-20 Rule course geared towards kids elementary and up. If you would like to talk to a NASB representative about how to start a savings account, call us at 800-677-6272 or click here for more information.
