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Money Management Blog

Understanding the 50/30/20 Rule

Published: January 14, 2019

There are many, many ways you can develop a budget, create a savings a plan and organize your financial life. Some of them are simple, some are complex. But there are some basic best practices that apply to pretty much everyone, and the 50/30/20 rule falls into that category. The concept was first developed by Harvard bankruptcy expert and U.S. Senator Elizabeth Warren, and it works like this:

 

Limit your needs to 50 percent of your income

This starts with determining what your after-tax income is (what remains in your paycheck after taxes are taken out), then making a list of your monthly needs and their associated costs. Groceries, housing, utilities, insurance, medicine and your car payment all fall in the needs category. Following the 50/30/20 rule, these costs should not equal more than 50 percent of your monthly income.

 

Limit your wants to 30 percent of your income

Wants may include things like your cell phone bill, your TV/Internet bills, subscription services, clothing and shoes. Make sure those costs don’t total more than 30 percent of your after-tax income each month.

 

Earmark 20 percent of your income to savings/debt repayment

According to the 50/30/20 rule, you should put 20 percent of your income toward repaying debts (extra above the minimum payment you make on your credit card or mortgage, for example) and toward saving money for retirement/emergencies.

 

The concept is fairly simple, but can make a significant impact when it comes to managing your money each month. The right checking account and savings account can also make a big difference. Explore some great options here: https://www.bankwithsouthern.com/home/account-finder-selector.html