How To Follow The 50-30-20 Budgeting Strategy

This story is part of CNBC Make It’s One-Minute Money Hacks series, which provides easy, straightforward tips and tricks to help you understand your finances and take control of your money.

Managing your finances and setting a monthly budget can be challenging. But if you’re overwhelmed with where to start, the 50-30-20 strategy can simplify the process. The plan divides your income into three broad categories: necessities, wants, and savings and investments. Here’s a closer look at each.

50% of your paycheck should go toward things you need

This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments. If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

20% of your paycheck should go toward savings and investments

This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account. Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses.

Some also suggest building up your emergency savings first, then concentrating on long-term investments. And if you have access to a 401(k) account through your employer, it can be a great way to save a portion of your income pre-tax.

30% of your paycheck should go toward things you want

This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun. This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

Nadine El-Bawab

By: Nadine El-Bawab / @nadineelbawab

Source: How to follow the 50-30-20 budgeting strategy

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While that may not be realistic, there are some simple things you can do right now to improve your money situation. Try these five steps for successfully managing your personal finances. Another bonus? If you stick to these five tips, your financial problems may start to diminish, and you can start reaping the rewards of lower debt, saving for the future, and a solid credit score.

Take some time to write specific, long-term financial goals. You may want to take a month-long trip to Europe, buy an investment property, or retire early. All of these goals will affect how you plan your finances. For example, your goal to retire early is dependent on how well you save your money now. Other goals, including home ownership, starting a family, moving, or changing careers, will all be affected by how you manage your finances.

Once you have written down your financial goals, prioritize them. This organizational process ensures that you are paying the most attention to the ones that are of the highest importance to you. You can also list them in the order you want to achieve them, but a long-term goal like saving for retirement requires you to work towards it while also working on your other goals.

Below are some tips on how to get clear on your financial goals:

  • Set long-term goals like getting out of debt, buying a home, or retiring early. These goals are separate from your short-term goals such as saving for a nice date night.
  • Set short-term goals, like following a budget, decreasing your spending, paying down, or not using your credit cards.
  • Prioritize your goals to help you create a financial plan.

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