By Sponsored by JPMorgan Chase & Co.
03 Jun 2024, 08:00 AM EDT
Having a plan for your money is crucial to building a solid financial foundation. If you’re just starting out on your financial journey, the 50-30-20 rule can help you spend and save your money wisely.
By allocating your dollars into three main categories or groups: needs, wants and savings, the idea is to limit fixed expenses (or needs) to 50% of your after-tax income and discretionary expenses (or wants) to 30%, leaving 20% for savings.
The 50-30-20 rule is not a requirement but can be a great starting point to help you take control of your finances, plan your spending, and make progress toward your financial goals.
50: What are your needs?
In this group, half of your funds go to paying for expenses you can’t avoid. We all need food, shelter and health care, and other needs that could include transportation, clothing and utilities. Regular debt payments, such as monthly credit card and loan payments, would also be considered a necessity because you have a deadline to pay them each month.
What makes something a “need” versus a “want” depends on your lifestyle. Transportation is generally considered a necessity, but the type of transportation you select may vary depending on where you live. Having a vehicle may be a legitimate need to get to work and earn money to pay bills, but consider whether you need a luxury car or whether something less expensive would work.
We also need food and clothing, but funds spent on these two categories can flow into the “wants” pool depending on your choices, such as eating out instead of cooking at home or wearing designer clothes instead of basic clothing.
30: What do you want?
Everyone should be able to enjoy life’s simple pleasures and perhaps some extravagant ones, too. Set aside 30% of your funds for these “wants,” which can include entertainment, cable or streaming services, eating out, fitness memberships, travel, hobbies, self-care beyond the basics, and a cell phone. beyond the basic plan.
Overspending can be common in this category, as it’s fun to spend money on things we enjoy. Take the time to prioritize your most important wants and desires and reduce your spending if you find that your spending here exceeds 30%.
20: Save for the future
This category is about what you want to do with the money in the future. Do you want to travel the world? Retire early? Help your children pay for college? Once you have managed your essential needs and most immediate wants, you can allocate the rest of your funds, 20%, to achieving your long-term goals.
If you want to pay off your debt faster, beyond making your required ongoing payments, you can use the money in this pool to accelerate your plan as well.
Reload your groups
Once you’ve tried this rule for a few months, you may notice that your spending and saving habits are a long way from the 50-30-20 guideline. That’s when it’s time to make some concessions.
Be honest about whether the items you are placing in the necessities category are vital to your life or whether you could classify some or all of those expenses as a want. It’s okay to spend more on housing if having a more expensive place is important to you; It just means you spend less on other expenses to balance things out.
If your wants are much higher than 30%, consider reducing them and contributing more to save for long-term goals. Likewise, if you don’t have 20% left after spending on needs and wants, consider making some adjustments to your other groups so you have enough to save.
Connecting everything
The 50-30-20 rule can help you allocate your money to needs, wants, and savings and offers insight into where you can make cuts. Use it to help you on your path to financial success.
For more savings tips, visit chase.com/personal/financial-goals.