Hello everyone and welcome to the “Coordinator’s Corner”, I will be posting different topics here every two weeks for you to review. I hope you enjoy the subject matter and are able to make use of this information. Come back often to view my updates and addition of various topics!
This segment will focus on the 50-20-30 Budget Plan. I hope you find this information useful and try and implement this rule in your daily life. So let’s get started! What is the 50-20-30 budget plan anyway?!!
50-20-30 Budget Plan
This is a simple budget plan to help you reach your financial goals. The basic rule is to divide up after-tax income and allocate it to spend 50% on needs, 30% on wants, and putting away 20% to savings.
The rule states you should spend 50% of your after-tax income on needs and obligations that you must-have or must-do. The remaining half should be split-up between 20% savings and debt repayment and 30% to everything else that you might want.
Here is how it works:
Needs are considered to be those bills that you absolutely must pay and are the things necessary for survival. Some examples include:
- Car payment
- Health care
These are your “must-haves”. Half of your after-tax income should be all that you need to cover your needs and obligations on these items. If you are spending more than that on your needs, you will have to either cut-down on your wants or downsize your lifestyle. Here are some possible ways to help you with this.
- Possibly move to a smaller house
- Rent a less expensive apartment
- Consider roommates
- Buy a modest car in order to decrease your car payment
- Maybe carpool or take public transportation to work
- Cooking at home vs eating out
- Buying groceries in bulk for lower prices
Wants are all the things you spend money on those that are NOT absolutely essential. Some of these items include dinner and movies outing’s, new handbag/wallets, tickets to concerts/sporting events, vacations, the latest electronic gadgets, or ultra-high-speed internet.
Anything under the “want” bucket are considered to be optional. This category also includes those upgrades decisions you make, such as choosing an iPhone 11 instead of iPhone 8, buying a Mercedes Benz instead of a more economical Honda.
Remember, wants are all those extras you spend money on, that make life more enjoyable and entertaining. But, do you really need them?!! Here are some possible solutions to help reduce your “want” spending.
- Workout at home instead of paying a gym membership
- Cooking at home instead of eating out
- Watching sports on TV instead of attending a sporting event
- Buying non-brand name items, instead of brand name items
- Enjoy a staycation
- The latest and greatest may not always be budget friendly so opt for something “not so new”
We finally get to the savings. Try to allocate 20% of your net-income to savings and investments. This includes adding money to an emergency fund in a bank account, making IRA contributions to a mutual fund account or investing in the stock market. Your goal should be having at least 3 months of emergency savings on hand at all times, in case you lose your job or have unforeseen event occurs.
After that, focus on retirement savings and meeting other financial goals down the road. There is an important thing to remember here. If emergency funds are ever used, the first allocation of additional income should be to replenish the emergency fund account.
The Bottom Line:
Saving is difficult, and life often throws unexpected expenses especially during these difficult times that we are currently facing. By following the 50-20-30 rule, you now have a plan with how you should manage your after-tax income. Life should be enjoyed, so I am not suggesting that you not have fun and make the most of it, but having a plan and sticking to it will allow you to cover your expenses, save for retirement, all at the same time doing the activities that make you happy!
After-Tax Income: relating to income that remains after deductions of taxes on your paycheck.
Savings Account: an interest-bearing deposit account held at a bank or another financial institution.
Net-Income: money received, especially on a regular basis, for work or through investments.
IRA Fund: tax-advantaged accounts designed for long-term savings and investments.
Mutual Fund: a type of financial account made up of a variety of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Budget: an estimate of income and expenses that is set for a period of time.