The 50/30/20 Rule

One of the most important steps in improving your financial health is to create a realistic budget that allows you to live within your means but also allows you to save money for a variety of purposes: maybe that includes new furniture, advancing your education, a down payment on a home, or giving you the funds to buy the new car you’ve been longing to drive. So what’s a good strategy that can help you save money while also affording life’s necessities? Try the “50/30/20” savings rule – it’s really just a simple strategy that gives you the discipline to create a budget you can live with. Let’s start by divvying up your take-home income (not your gross income) into these three very important categories:

Look At Your Needs: This should represent 50% of your income. All of these expenses are the types that we all consider necessary and part of our daily lives.  These could include:

  • Housing
  • Food
  • Transportation
  • Basic utilities
  • Healthcare
  • Minimum debt payments
  • Child care

Consider Your Wants: This category should represent 30% of your income. When determining what your “wants” are think of all those things in your life that you wouldn’t consider essential to living, such as food. Maybe consider all the items that you would consider fun things to make your live more enjoyable. These could include:

  • Travel
  • Entertainment
  • Dining out
  • Additional services, like traveling to see a friend or attend a sporting event

And Build Your Savings: This is a very important category and is vital to preparing for your future. Paying off debt, especially high-interest debt, can also be considered a form of saving. So your savings items could include the following, and by setting aside 20% of your income to these categories you could ease the burden of worrying about never having enough money saved for the truly important things in life:

  • An emergency fund
  • Additional debt payments for a car or a down payment
  • An education fund
  • A retirement fund

Please note: This information is designed to offer a general understanding of common financial terms and practices and should not be considered financial advice from Charter Oak Federal Credit Union. Every individual has different financial needs and goals, which should be discussed with a financial professional.