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Building wealth with the 50-30-20 rule.



April 19, 2024

3 min read

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      The 50-30-20 rule is one of the simplest ways for you to change your habits and build wealth long-term. Before you go deep into personal finance and investing, this expert-approved approach will help you plan your financial decisions and establish a strong foundation.

      Let's be honest, budgeting isn't fun.

      We’ve all downloaded a budgeting app or started an excel sheet with the very best of intentions just to abandon it a few days later.

      Whether it’s the amount of time it takes to input every penny or the shame you feel when you splurge on something well deserved, budgeting isn’t fun.

      But managing our finances doesn’t need to be complicated or demand an unrealistic amount of time. In fact, the most effective budgeting tips are oftentimes the simplest ones.

      Simplicity is key to the 50/30/20 rule.

      It’s an easy way to get a handle on something that can otherwise be intimidating. This clever and straightforward monthly budgeting method tells you exactly what to do with your money and where to put it.  

      It gives you a big picture overview of your budget per month, so you can avoid overspending and consistently build up your savings. All without the need of keeping track and recording every transaction or penny that you have spent.  

      We’re all human. Living responsibly doesn’t mean living in austerity. What’s important is having a plan and sticking to it. You can cover your expenses, save for retirement, and still spend money on the things that make you happy.

      The basic idea of the 50-30-20 rule is to divide up your salary after-tax income and allocate it like this:

      Set aside 50% of the money you earn for basic expenses or needs.

      The things are necessary for survival, such as rent or mortgages, bills, health care, groceries, car payments or transportation, and so on. In other words, the expenses you must have and must do.

      Spending more than 50% of your salary on your needs? Consider if it’s possible to downsize your lifestyle by moving to a smaller house, switching to a more modest car, and so on. If not, you’ll need to cut down in the other categories until your needs decrease.

      Put 30% of your money towards personal expenses or wants.

      Things you want but don't necessarily need. These include dining out, traveling, buying clothes, the latest electronic gadgets, leisure activities, parties and so on. In other words, all those extras that make life more entertaining and enjoyable. 

      Traditional budgets often frown upon items in this category - eating out, a taxi to the airport, a new outfit. And these are the easiest expenses to cut if you’re running over 30%. But work is only worth the life that it helps us create. Treating yourself responsibly will help you stick with your goals long term.

      Dedicate 20% of your money to saving for the future.

      This money is a safety net that will prepare and protect you for the future, whatever it may hold. From buying a house to losing your job, both expected and unexpected life events are made easier with savings. And while retirement may sound worlds away, your future self will thank you for starting now.

      If you have debts, you may first want to use money from this 20% to pay down your balances faster. While your monthly minimum payments fall into the needs category, making extra payments can be beneficial. This is especially true if you're paying high interest rates on your debt, like rolling over credit card balances.

      If you have no savings, you’ll want to prioritize an emergency fund. The ideal emergency fund is enough to cover about six months of essential expenditure or needs. This fund would get you through unexpected tough times. Once you’ve got that secure, you can explore other options like IRAs, 401ks, and brokerage accounts.

      How to apply the 50-30-20 rule to your financial life step-by-step:

      1. Calculate your after-tax income.

      After-tax income is equal to monthly net income minus taxes and social and medical services.

      • If you’re an employee with a steady paycheck, you can find this information on your payslip. See how much you receive each month (the amount of your direct deposit or check). If your paycheck automatically deducts extra money for things like a 401k or health insurance, add them back in.
      • If you are a freelancer, your after-tax income is what you earn in a month, minus your business expenses and the amount you need to set aside for taxes.

      2. Categorize your spending over the past month.

      See how and where you’ve spent your income over the past month, splitting all your expenses into the three categories: needs, wants and savings. You could use your bank statement as a reference.

      3. Adjust your spending according to the 50-30-20 rule.

      Once you know how you're splitting your money each month, you can adjust your budget and spending habits according to the 50-30-20 rule. See if you need to make any changes to have the proper balance between needs, wants, and savings.

      The hardest part of the rule? Getting started.

      Financial security means options for your future so give it the importance it deserves. Build your three-part plan and make the most of your money. 

      Don't lose any more time to build a strong financial foundation. If you don't know where to start, Playbook can help. Apply the 50-30-20 rule and other best practices so you can have confidence that your finances are on the right track.

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      Save your cents from Uncle Sam

      Grow your wealth with a personalized financial plan and tax-advantaged investments.

      Start saving today

      Save your cents from Uncle Sam

      Grow your wealth with a personalized financial plan and tax-advantaged investments.

      Start saving today

      In this article