Budgeting with the ’50/20/30′ Rule

budgetingWe just finished the first quarter of 2022. Did you start a budget? If not, don’t make it too complicated. The most important part of preparing a budget is getting started.

You can track your spending with Quicken, Mint, Excel or paper and pen.

Here are some helpful guidelines. I call it the 50/20/30 rule. Your net income should be allocated to the following:

  • 50% toward needs
  • 20% toward savings
  • 30% toward wants

I realize everybody’s situation is different, but nonetheless, it’s a good check on where the money is going.

Here’s a little more about each category…

Budgeting for the Needs

These items are your essentials. There is not much you can do to change what you spend in the needs category, unless you’re willing to make lifestyle changes — like a less expensive house or apartment or a cheaper car.

Needs include:

  • Housing (mortgage, rent, taxes, insurance)
  • Utilities
  • Health insurance (if not already deducted from paycheck)
  • Transportation
  • Insurance — life, disability, auto, etc.
  • Childcare and other kids’ expenses

Allocating Funds for Savings and Debt

Start with saving as much as you can in a retirement plan at work. Many employers provide a “match” for a 401(k) plan.

You should also build a three- to six-month reserve of monthly spending — a rainy day fund. Life happens.

Have a plan to pay down your debt. Start with your highest interest rate debt first. Pay off your credit card each month. These rates tend to be high.

Then save for:

  • Large purchases
  • College tuition (open 529 plans — very effective)
  • Retirement (IRAs, Roth IRAs, investment accounts)

Having Fun with the Wants

The fun stuff! These are discretionary items, and you have more flexibility here. This category includes:

  • Dining out/entertainment
  • Travel
  • Luxury purchases (jewelry, art, etc.)
  • Gym memberships

Some people will look at charitable contributions as a need, others as a want.

Matching Spending with your Core Values

Take a look to see if your spending is in line with your core values. I’m reminded of clients who valued flexibility, but were tied down by two homes and the related maintenance, taxes, etc. They made the tough decision to downsize, but travel more, and don’t feel as much weight on their shoulders.

My Favorite Quote:

“You can have anything you want — not everything you want.”

About The Author

Shari Greco Reiches is a wealth manager and behavioral finance expert. She is the co-founder and Chief Visionary Officer of Rappaport Reiches Capital Management, and the author of “Maximize Your Return on Life — Invest Your Time and Money in What You Value Most.”