Yahoo Finance How To Split Your Paycheck To Buy Anything You Want
There are a lot of ways to budget. Some are quite complicated, but there are also simple budgeting methods. The 50/30/20 rule is a straightforward budget method that allows you to make and stick to a monthly budget. It tells you how to split your paycheck to eventually buy everything you want and need while still saving money.
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What Is the 50/30/20 Rule?
The 50/30/20 rule was created by Sen. Elizabeth Warren and her daughter Amelia Warren Tyagi. The 50/30/20 rule is a way to budget that involves dividing your after-tax income — also known as your take-home pay — into three categories:
Needs: 50%
Wants: 30%
Savings and debt: 20%
Needs are things that are necessary for survival and basic living. Needs include housing, food, utilities, healthcare, childcare and transportation. Even though these are needs, you can still work to reduce the cost of your needs. Buying cheaper groceries, living in a less expensive house or getting a roommate to split your housing costs are ways to reduce the expenses of your needs category.
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Wants are not essential expenses, but they can improve your life. Wants include vacations, eating out, clothes, entertainment, furniture, electronics and hobbies. It’s pretty easy to see how you could reduce the cost of your wants. Buying less expensive versions of the items in your wants category could be an easy way. While 30% may seem like a lot to spend on wants, it includes nearly everything that doesn’t fit in the other two categories.
The last category is savings and debt repayment. The breakdown of debt payments or savings will depend on your circumstances. Savings can include an emergency fund, retirement contributions or saving for a specific goal like buying a home.
If you are debt free, you may want to contribute the entire 20% to your savings. But if you have debt, you must count that in your 20%. Pay down high-interest debt first, like credit card balances or student loans with high interest rates.
“To take the 50/30/20 budgeting method a step further, consider leveraging automated sub-accounts within your main bank account,” said John Grace, president and founder of Investor’s Advantage Corporation. “Many banks now allow you to create virtual envelopes for various categories. Allocate funds for necessities, wants and savings into these sub-accounts. This offers a visual representation of your budget, making it easier to track and manage your spending.”
The benefit of the 50/30/20 rule is that it is simple and easy to keep track of your spending. The 50/30/20 rule provides clear guidelines for where your money should go and sets a clear goal for how much you should save. It also prioritizes debt reduction, which many Americans struggle with.
The 50/30/20 rule may be less intimidating because it is simpler than other complicated budgeting methods. It allows you to set boundaries while still treating yourself.
However, the 50/30/20 rule can be difficult to adhere to if you live in a high cost-of-living area or have a lower income.
How To Apply the 50/30/20 Rule and Always Buy What You Want
To use the 50/30/20 rule, there are a few simple steps to follow.
First, calculate your after-tax income. This will be your take-home pay. If you are a freelancer, your after-tax income will be what you earn monthly minus your business expenses plus what you set aside for taxes. If you are a full-time employee with a steady paycheck, your after-tax income will be your paycheck amount.
Next, categorize your monthly spending. You’ll want to look at your bank and credit card statements for the past 30 days. Divide your expenses into three categories: needs, wants and savings. Use the earlier criteria to divide your expenses into these categories.
After you’ve sorted your expenses from the past month, you should see how they are split between the different categories. You should start making adjustments if they don’t match the 50/30/20 rule. Try reducing your wants if you’re having trouble hitting your 20% savings and debt target.
“Life is dynamic, and so should your budget allocation,” Grace said. “A lesser-known aspect of the 50/30/20 method is the ability to adjust the ratios as your life evolves. For instance, if you’re starting a family, you might need to shift more into the ‘necessities’ category.
“On the other hand, if you’ve paid off significant debt, you can divert more funds into savings and investments. By maintaining the 50/30/20 framework but adapting its proportions, you ensure your budget remains relevant and aligned with your current circumstances.”
The Bottom Line
The best budget is the one that you can stick to. With the 50/30/20 rule, you know exactly what every expense should be categorized as and how much money you should be allocated to each category. Going down this route should allow you to buy anything you want and still be able to save.
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