The 50-20-30 Budget Rule is intended to help you budget your after-tax income. The premise of the rule is simple – divide your after-tax income into three categories: 50% goes to “needs,” 20% goes to “savings,” and 30% goes to “wants.” This formula can help individuals plan for unforeseen emergencies or retirement, and can also help avoid credit card debt. Once you have determined your after-tax income, you can start to distinguish which of your expenses fall under each of the three categories.
50% – Needs
Needs are defined as essential expenses, or in other words, things necessary for survival. These include rent or mortgage payments, transportation, utilities, groceries, insurance, health care, and minimum debt payments. Minimum debt payments can be loan payments or the minimum payment on your credit card bill.
20% – Savings or Debt
20% of your after-tax income should be used to save money or to pay off debt. This could include setting aside money into a savings account or emergency fund, making IRA contributions, or it can be used to pay off debt, such as student loans or credit card debt (separate from the minimum requirement already paid under the “needs” category).
30% – Wants
Think of the “wants” category as the fun category; this includes all the things you want to do, but if you had to go without them, you could. These things include entertainment, memberships or subscriptions (such as Netflix or HBO), dining out, alcohol, vacations, cable TV, tickets to sporting games, or other non-essential items or experiences.
Once you have established which expenses fit into each category, you will likely have to do some tweaking to ensure your spending habits fit roughly within each suggested percentage. It’s important to note that the ability to follow the 50-20-30 Budget Rule may partly depend on the area that you live in. For locations with a higher cost of living, like Southern California, the 50% allocated for “needs” may not be sufficient. If this is the case, money would have to be taken out of one of the other categories.
If you do have to rearrange money from other areas to cover your “needs,” it’s highly recommended that you pull it from the “wants” category rather than the “savings.” Pulling this money from your “wants” category and putting it into savings instead may not always be the most fun thing to do, however, it is the smart thing to do. According to data released by the Federal Reserve’s Survey of Consumer Finances, the average credit card debt of U.S. families is $6,270. Restructuring your spending habits by saving a small percentage of your income can help during times where unexpected events turn into unexpected expenses. Getting in the habit of saving can also help prevent debt from building up.
While the 50-20-30 Budget Rule can help you manage your finances, it does not guarantee you will avoid incurring credit card debt. If you do find yourself in credit card debt, there are ways to help you get out of it. PCS Debt Relief specializes in credit card debt settlement, also known as debt forgiveness. There are no monthly or upfront fees, and we offer a free consultation with a PCS Debt Analyst to review your current situation and see how we can best assist you. For more information, please visit us at www.pcsdebtrelief.com or call (636) 209-4481. We are here to help you every step of the way!