In this article, you’ll shed some light on a practical money planning rule that was popularized by Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan.” Namely, you’ll take a crack at answering the question: What is the 50/20/30 budget rule?
My sleeves are rolled up, so let’s begin!
Personal finance advice in 2019 can come in all types of forms. Blog tips, suggestions from friends and family, advice from financial advisors and possibly more. Many of these however can sometimes be elaborate and too complicated to realistically implement into a person’s reality and busy lifestyle.
At the end of the day, most people are looking for simple, easy to remember budgeting techniques that allows them to cover all of their expenses, have some expendable income to spend on things they enjoy, and save some dollars along the way.
So, luckily, there is a general rule known as the 50/20/30 budget rule which can do exactly the above and help you accomplish many of your financial goals without having to get too much into the fine details of where every single dollar is going.
So, what is the 50/20/30 budget rule and how can it help to maximize the value of your yearly budget?
Understanding the 50/30/20 budget Rule
The basic principal behind this yearly budget rule is that you should only be looking at your post-tax income when budgeting. Once this number been figured out, you can divide your income into three buckets of sorts, namely:
- Needs
- Wants
- Savings/Debt
50/30/20 budget Rule broken down
- 50% of your after-tax income can be used for things you need
- 30% of your after-tax income can be spent on things you want
- 20% of your post-tax income should go to either savings or paying off existing debts
What is The Difference Between Your Pre-Tax and Post-Tax income?
Your pre-tax income is the salary that you agreed to or the hourly rate you agreed to multiplied by the number of hours you work in a particular pay period.
This is also known by some as your gross income because it is the total calculation of money you make before any taxes are taken out. Post-tax income is all of the money that is actually deposited into your account once taxes have been removed. It is important to use this figure as the basis for your budget because it is the actual amount of money you have at your disposal each month.
What Does A Senior Financial Advisor Consider A Need?
Needs can be thought of as absolute necessities or things that you simply cannot go on without.
Needs include things like a mortgage or rent as well as utility bills to keep the lights on and grocery bills to keep the fridge stocked each week. While there is some debate on other needs, many have begun to include things like cell phone bills, internet and automobiles into this category as well because of how common and widely used they are in our society.
What Does A Senior Financial Advisor Consider A Want?
Wants are all of the other things that do not fall into the need buckets.
This can include not only physical things, like a new television or a fun new gadget, but also experiences like taking your family out to dinner or on a vacation overseas.
Personal finance advice states that wants should account for no more than 30% of your after-tax income if you are going to ensure your financial success. It is acceptable for you to spend some of your hard-earned dollars on extra things that you want, it is just important to keep this kind of spending in check to ensure that your yearly budget continues to go according to plan.
What Are the Advantages of Saving and Paying Down Any Debts?
Saving money and paying down debts are one of the quickest paths to financial freedom.
It is entirely true that it costs more money to be poor and have zero savings because unexpected expenses can come at a premium in the form of paying back a loan, whether personal or on a credit card, with interest.
Savings allow unexpected expenses to be fully covered in cash. Additionally, using the last 20% of your after-tax income to pay down your debt allows me to ramp up your savings over time.
But how can you begin to tackle all of the debt you’ve incurred over the years?
There are typically two main schools of thought among personal finance advice when it comes to the order in which you pay down your debt and they depend largely on someone’s particular situation.
They include:
Debt-snowball method
The debt-snowball method would be used if you were trying to reduce your monthly minimum payments.
This is done by aggressively paying down the debt with the lowest total remaining balance such as a car loan with only a few hundred dollars left on it. Then, once this debt is paid off, the amount of expendable income you have each month has grown. You can then move on to the next smallest debt total and repeat the process even faster with these additional funds.
Each time you eliminate one source of debt, the process has a sort of “snowball effect” which makes it easier not only to make your monthly payments, but also to make larger payments to pay down debts even faster.
Paying off highest interest in descending order
Conversely, let’s say you are not having an issue paying down your debt and instead want to pay your debt off in a way that will save you the most amount of money.
This technique is much simpler in that it involves paying down debt with the highest interest rates first regardless of the balance of your other debts. By paying less interest overall, you are maximizing your savings in other areas leading to a faster final debt payoff.
Each of these debt payment techniques can be used depending on the specific financial situation you are in.
The 50/20/30 budget rule can help drastically help keep your budget in check without getting overly complicated and is widely regarded as one of the simplest yet most effective pieces of personal finance advice a person will ever receive. By sticking to this plan, you are able to worry less about money, and more about all of the fun new things you are going to plan now that your financial life is back on track!
Please note: All tips, recommendations and advice are given on my blog simply as information. For an actual consultation, please schedule a meeting with me by phone or email and I will gladly take the time to provide you a personalized financial strategy!
