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The 50-20-30 (or 50-30-20) budget rule is a simple plan to help you reach your financial goals. The idea is you should spend up to 50% on your after-tax income on needs 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.

Needs – 50%

Needs are those goods and services you have to purchase to live your most basic life. These include your housing (rent or mortgage) payments, car payments, groceries, insurance, medication, minimum debt payment, and utilities. These are your “must-haves.” If you can do without it – streaming services, restaurant dining, hobbies – it’s not a need.

Half of your after-tax income should be all that you need to cover your needs. If you are spending more than that on your needs, you may want to downsize your lifestyle, perhaps to a smaller home or more modest car. This might include delaying big life goals or even simple changes like eating at home more often.

Savings/Debt Repayment – 20%

Of the other half of your income, the first 20% should be applied to growing your savings and reducing your debts. This includes adding money to an emergency fund in your savings account, making contributions to a retirement or education account, and investing in market-growth accounts like stocks, bonds, and mutual funds. You should have at least three months’ income of emergency savings on hand in case an unexpected event occurs like injury, losing your job, or damage to property not covered by your insurance. After that, focus on growing long-term savings like your investment and retirement accounts so that you can reach your goals.

You should also make a commitment to repay your debts. While minimum payments are part of the “needs” category, any extra payments reduce the principal and your total interest owed, so they are savings. Think of it this way: would you rather continue paying a lender, or yourself?

Wants – 30%

Finally, the last 30% of your income should be devoted to those items and experiences you want. Wants are non-essential, but make life more enjoyable. Depending on your lifestyle, this may be dining our regularly, taking more than one vacation a year, or owning the latest smartphone or tablet. Wants are important to keep us motivated and make life interesting, but they’re not absolutely necessary for survival. When you need to make your lifestyle fit your budget, this is the first area to make changes.

Often the purchases we make in the Wants category have more affordable alternatives. You may want the luxury SUV when the mid-range sedan carries you to the same destination, or enjoy a personal trainer when a 24-hour gym membership would allow you to stay in shape. When your budget accommodates a Want, you should enjoy it without feelings of guilt. If the budget becomes smaller, you should also have the courage to make changes in your financial best interest.

Where did the 50/20/30 rule come from?

American debt exceeds $14 trillion as of March 2020. Senator Elizabeth Warren popularized the so-called “50/20/30 budget rule” (sometimes labeled “50-30-20”) in her book, All Your Worth: The Ultimate Lifetime Money Plan. The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement.

Conventional wisdom has always encouraged living within your means but the 50/20/30 budget rule provides additional, specific guidance for how to remain disciplined as you live your life. At a fundamental level, money is intended to enable us to live better. While this budgeting framework is a rules-based structure, it’s meant to simplify your financial management, not constrain and complicate it.

How to Use It

Before implementing a 50/20/30 budget, review your spending habits, perhaps using your most recent e-statement or digital banking account. Do you overspend on clothes? Entertainment? Food? Gadgets? Figuring out your spending vices from the very beginning will help you learn how to use a 50/20/30 budget that effectively cuts spending where you need it most.

Take a look at your spending over the last few months and note the trends. If you find that you’re overspending on going out for food and drinks, come up with a plan for how you can avoid this scenario. Take turns cooking with your friends, look for restaurant specials, or host at-home cocktail parties instead of happy hour. There are plenty of ways to budget and save money without compromising your social life.

Here are some steps you can follow to start your 50/20/30 budget:

  1. Determine the monthly amount of after-tax (net) income your household receives
  2. Review your spending trends, using statements or digital banking (Hint: HFS Online Banking offers an automatic budgeting tool that will categorize your spending into common categories. Give it a try!)
  3. Categorize your expenses as needs, savings/debts, or wants
  4. Identify unnecessary or excessive expenses that can be reduced or eliminated
  5. Use an envelope system or a computer or smartphone app to stay accountable to your budget
  6. Continue to review your spending trends and make adjustments to your budget as needed.

The Rule in Action

Like any budget or diet, the 50/20/30 method is only as good as your willpower and dedication to following it. While it is not guaranteed to make you abundantly wealthy, following the principles can create opportunities for your household to realize its dreams.

Consider Josh and Kindall, a young married couple with a limited income. They wanted to start a family but were afraid of being able to afford additional mouths to feed. After adopting the 50/20/30 budget and the envelope system, Josh and Kindall discovered they could spend less on merchandise and small experiences in the short-term, so they could repay their debt quickly and be more diligent in their savings. With zero non-mortgage debt and adequate emergency savings, they were confident enough to begin family planning. They now have two beautiful kids!

Does the 50/20/30 budget work for everyone?

While the 50/20/30 budget is an effective way to organize your spending and identify excessive or unnecessary spending, there is no “silver bullet” for your finances. Bear in mind that most budgets presume that your income equals or exceeds your needs and debts. If your household is servicing significant debt or you have lost income, simply organizing your expenses may not be enough to overcome a shortfall.

If your net income (or pay that you receive after taxes have been taken out) does not equal or exceed your essential monthly expenses like your housing, vehicle loans, groceries, healthcare/medication, and utilities, simply budgeting differently may not resolve the shortfall. You might consider speaking with a Certified Financial Counselor or taking on additional part-time jobs that allow you to supplement your income, so that you can sufficiently meet your obligations.

Perhaps your after-tax income is adequate but you have a significant amount of debt to repay as well. While reviewing your expenses and eliminating excessive or unnecessary spending may be a great start toward a 50/20/30 budget, monthly debt repayments are often fixed amounts that cannot be changed.

You may need to work directly with your creditors or a debt management solution to evaluate changes to your repayment arrangements. You could also speak to your local credit union about a consolidation loan. Sometimes you can save money and lower your overall monthly payments by combining your debt into 1 loan. Here at HFS Federal Credit Union our knowledgeable staff can assist you with a personal loan to help consolidate debt. Call (808) 930-1400 to make an appointment with one of our loan experts, or apply for a Personal Loan online at https://hfsfcu.org/personal-loans/.

Make an appointment with a Loan Officer and ask about a Personal or Consolidation Loan. A budget like 50/20/30 can also help you to ensure that any commitments you make to repaying your debt are kept as you actively stay accountable to managing your money.

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