October 31, 2023 // Sqwire Team
Food, shelter, and clothing.
If this were Jeopardy, the question would be “What are the basics every person needs in daily life?”
By definition, “basic” is uncomplicated. However, as any adult knows, maintaining those basics on a regular basis is anything but simple. Throw in the add-ons, like entertainment, dining out, vacation, and various small pleasures that enhance overall quality of life. Then there’s the aspirational notion of savings, which is also pretty important given the likelihood of unforeseeable events and the necessity of retirement.
It’s a lot to manage. Where do you begin?
Work is the starting point, of course. With income comes the ability to provide for yourself, and your dependents if applicable, as well as put aside money for fun and “just in case.” What happens when work isn’t enough? That’s the crux of the struggle for many Americans. When you’re working and your money isn’t working for you, what do you do?
Personal finance made simple(ish)
Managing your personal finances is crucial. The 50/30/20 rule, also called the 50/30/20 principle, is a straightforward guideline that can help you achieve your financial goals. With this ratio in mind, you’ll divide your income into three categories: needs, wants, and savings.
Before we get started, here’s some real talk: While the 50/30/20 principle is sound advice, the truth is, it isn’t within reach for everyone at all times. In today’s economy, many people spend more than 50% on needs. Don’t let that stop you from applying this principle with whatever ratio works for you. Once you see how it builds your confidence and your financial fitness, you’ll grow toward achieving 50/30/20.
50% for needs
The first category, comprising 50% of your income, is allocated for needs. These are the must-haves of daily life. By prioritizing this category, you establish an invaluable sense of stability.
While each person’s list will differ, there are some universal items:
Housing: Rent or mortgage payments, property taxes, and homeowners’ insurance.
Utilities: Electricity, water, gas, and heating.
Transportation: Car payments, gas, public transportation, and car insurance.
Groceries: Food and essential household items.
Then there are items that apply to many, if not most, Americans:
Health Insurance: Premiums and co-pays.
Debt: Credit card payments, student loans, and other debt obligations.
Childcare: If applicable, expenses related to child or dependent care.
30% for wants
The second category, representing 30% of your income, goes toward wants. These are discretionary expenses that improve your quality of life but aren’t strictly necessary for survival. Although a want is theoretically separate from a need, in practice, wants are pretty important. They allow you to enjoy life and exhale. Striking a balance between needs and wants is a key part of making financially wise decisions.
Some common examples of wants:
Dining out: Restaurants, takeout, and coffee shops.
Entertainment: Movie tickets, streaming services, concerts, books, and hobbies.
Travel: Vacations, day trips, and weekend getaways.
Fashion: Clothing and accessories.
Electronics: Gadgets, upgrades, and tech accessories.
Personal Care: Haircuts, beauty products, and spa treatments.
20% for savings and debts
The final category, making up 20% of your income, is dedicated to savings and debt payments. This 20% serves as your foundation for creating a financial safety net. It ensures that you’re prepared for the unexpected and on track to meet long-term financial goals.
Emergency Fund: Building and maintaining a fund to cover unexpected expenses.
Retirement Savings: Contributing to retirement accounts like a 401(k) or IRA.
Investments: Building wealth through investments in stocks, bonds, and other assets.
Debt Repayment: Trimming away the fat from your financial output.
Applying the 50/30/20 principle in real life
The concept of financial wellness can be intimidating. You might think it’s only for people who have already achieved wealth. However, a healthy way to approach 50/30/20 is to see it as building a muscle. Anyone can do it. However, like physical fitness, financial fitness requires discipline. Follow a plan that works for you. When you keep it simple, you’re more apt to follow through.
Remember, you don’t have to achieve a perfect 50/30/20 ratio. What matters most is that you make the effort and stick with it. Your plan is just that: yours. Come up with numbers that fit your reality.
No matter where you are in your journey, here’s how you can apply this rule to your personal finances:
- Assess your current financial situation.
- Create a realistic budget.
- Prioritize essentials.
- Allocate wants mindfully.
- Commit to savings and debt payments.
Financial wellness is within reach
The 50/30/20 principle is a practical, flexible approach to managing your personal finances. By dividing your income into needs, wants, and savings, you can achieve financial stability, enjoy life’s pleasures, and build a secure future. With dedication and consistency, watch your financial well-being flourish.
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