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By Melissa Green | Citizens Bank Staff
If you’re new to budgeting, figuring out how to manage your money can feel overwhelming. Not only do you need to organize, but you also have to make difficult decisions about how to spend your cash. A good way to keep it simple is a percentage-based budget; it divides up your monthly income to go toward your expenses, savings, debt, and whatever categories you choose. One of the most common percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.
Learn more about the 50/30/20 budget rule and if it’s right for you.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These expenses can include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities.
The "needs" category does not include items that you can honestly live without, such as cable, or Netflix, unfortunately; these will go into the “wants” category.
Optional expenses or “wants” should account for 30% of your income. Anything from dining out, clothes shopping, Starbucks, your cable or cell phone plan, travel, gifts, or a gym membership qualifies as a want. In the grand scheme of things, these purchases may be important to you, but they are optional costs.
The remaining 20% of your income should go toward saving money. About 61% of people ages 25 to 34 have less than $1,000 saved. Saving can include opening a deposit account to save for an emergency fund, a down payment, vacation or any other larger goal. It could also mean contributing to an investment account or a retirement plan, like a 401(k) or IRA. You can also allocate part of this section to paying down any debt.
Consider taking an extra savings step by using “round up” programs online or with mobile apps that take your debit card transactions, round them to the nearest dollar, and automatically transfer the “change” to your savings. You can also set up direct deposit, so that a portion of your paycheck goes right into your savings account.
The 50/30/20 rule can be a good budgeting method for some, but whether the system is right for you will be determined by your unique circumstances. Depending on your income and where you live, 50% may not be enough to cover your needs. For example, people who live in a high cost area may have to put a large part of their income toward housing, making it almost impossible for them to keep their needs under 50%. So you may need to adjust the percentages to fit your situation.
Having three categories to track might help prevent you from getting bogged down in the process of categorizing each individual expense. For others, the lack of structure could make it harder to find ways to improve their spending habits. Ultimately, you need to decide what type of budgeting system is right for you based on your habits and circumstances.
The 50/30/20 budget is an example of a percentage-based budget. Take a look at your financial situation and goals, and come up with a formula that works for you. Whatever budgeting method you choose, it will only work if you stick to it.
With automatic transfers from your checking to savings account, you can set money aside and watch your savings add up.
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