INTRODUCTION AND CHART
So you may be wondering what the 50 30 20 rule is. So we have below a pie chart, and half of this pie, which is the 50%, actually stands for your needs.So again, this is all about budgeting and understanding where your money is going and an ideal personal budget portfolio. So 50% are needs. Let's call this 30% are going to want and then 20% are going to save or pay off debt. So now that you have a visual representation, let's break down each one of these numbers and give you examples of each so that you can be gauging your own personal finance based on these metrics. Keep in mind, we're working with aftertax dollars, which is called net income. You may have a gross pay of,let's say, 50 grand a year, but after taxes, you're only dealing with another specific number. We're using that after-tax dollar number.
.jpg)
NEEDS
So in terms of the 50% needs, what are some things that can be included in this? Let's think about regular living expenses. We have groceries, we have housing.Whether you have a mortgage or rent, you have insurance for health.Heaven forbid something happened to you.You can have utilities, electricity, things like that, ETCA. Et cetera.So, the way I define a need is that it's basically something that would greatly inconvenience you or something that you literally cannot live without : food, shelter, and things like that. So when you budget 50% towards your needs, remember that those are what you're looking at.
WANTS
DIFFERENCE BETWEEN NEEDS AND WANTS
A want is something that causes a minor inconvenience in your life, It's not necessarily a need to where, hey, if I don't eat or if I don't have shelter, I may die, right?A want is something where it's like," hey, am I willing to give a minor inconvenience like dropping Netflix or not having Hulu, or not buying a brand new grill to grill a steak on?" Those are needs. Some of the things that would fall under this category would be things like shopping.Do you absolutely need to shop for brand-new clothes right this second?Are you going to drop dead if you don't get a new pair of shoes?Maybe my wife will, but I know that I can survive dining out.I think this is a big one for Americans. A lot of people, for whatever reason, their lifestyles are so busy that it's easier just to jump in the car and go grab something to eat rather than preparing the food yourself. So I think that everyone should definitely have a hobby.That's one of the greatest joys of life, whether it's gardening, you fly drones, you're a video editor, or whatever you want to do, whatever keeps you happy.As a hobby, this definitely falls under a want because it's not necessary to live.So again, guys, a want is something that you don't necessarily need, but it improves the quality of your life greatly.
SAVINGS
Let's go to the last 20%.And I know a lot of this sounds basic, but until you actually write this down and understand where all your money is going to, it's like your wants can easily creep into that needs category to where they're both overflowing and you're in debt every month.And speaking of debt, let's talk about savings. So savings and paying off debt, this is where the last 20% of your income should go to.And again, these are all net numbers. If you have, let's call, let's say, for example, an emergency fund, I would consider savings.What I like to do for emergency funds, this is six to twelve months of living expenses.So if you know that your needs category and a few wants coming out to be, let's say, $2,000 a month for your entire family, you know that you need to save about 12,000 $24,000 in your emergency fund.I know that sounds like a lot of money, but one or two layoffs in a family of one or two income earners, that can really save your butt right there.You guys obviously paying off debts.So if you have credit cards, student loans, things like that, these are debts that you should just smash using that 20%.And then obviously, if you want to save for retirement.In my opinion, this is one of the things that most Americans will be suffering from in 2030 years from now, because a lot of them are just not focusing on retirement savings.
I know a lot of this stuff sounds like common sense, you guys, but until you actually create a monthly budget knowing what your monthly net income is, breaking it down by 50, 30, and 20%, you would be surprised at where different dollars go for different categories.So unless it's not a want or a need, I would definitely put it under this 20% savings and debt category.
CONCLUSION
I know that this may not be some earth-shattering information, but again, until you actually write it down and understand where every single one of your after-tax dollars is going, you might be surprised.