How To Save Money:
So what is the 50 30 20 rule? Well it’s a basic guideline for finances and budgeting, with this applying to pretty much anyone.
I’m going to give you guys an example here for how this rule applies to the average person. So we’re going to just say it’s someone who’s after-tax income is about $30,000 – so I guess that before tax the person would make about what $38,000.
That’s the very first thing I need you to do if you want this rule to apply to you, figure out what is your after-tax income. I need you to write that down so we’re going to start off with this number. The 50 here means that 50 percent of your income should be going to stuff called needs. What are those needs? These are things I would consider housing, so whether it’s rent or mortgage housing, utilities, food and I guess transportation. Essentially just the basic necessities for you to live your life without having any sort of extra stuff. So again for this person, and for the typical person that works out to 15 K a year going to this stuff at maximum. That equates to just around $1,250 a month for most people. I just wanted to break that down into a more a simple form so $1,250 a month should be going towards housing utilities food and transportation.
Now what happens to a lot of people is that they’ll make $40,000 a year and their housing will be close to $1,000 and so that doesn’t leave too much for utilities food and transportation – so a lot of the times what I see is people renting simply because mortgages. Usually you have to pay less for mortgages than you do for rent, substantially less, so people who rent yeah they’re usually closer to the maximum portion of this 50% yeah then then most people.
So we’re going to move on here to the 30% – So 30% of your after-tax income should be going towards stuff called wants. Yes, this is pretty much what it sounds like it’s anything that’s a want so any sort of consumer purchase. Stuff like your phone, haircuts, vacations etc. Anything which isn’t a necessity to keep you alive!
We’re going to break that down, that’s roughly $9K a year or about $750 a month and again this is a very maximum. Breaking this down, $750 a month for all your wants you’re good!
Let’s move on to the 20%. 20% goes to stuff like debts savings – and I’m going to include this but it wasn’t included in the normal 50-30-20 year old – investments. So ideally you’d like to maximize this number as much as possible and keep the others as low as possible. I mean for me, my wants are extremely low and so are my needs – I do live a pretty frugal life. For other people, this number can be super inflated – especially a lot of wealthy people as they put a lot of their money into this 20% category.
So putting 20% of your income into something like a Roth IRA or stock market investments, real estate or just your emergency fund. 20% of your income should be going towards things in this category – so for this person that works out to roughly $6K a year or about 500 a month.
What’s really sad is that, especially young people, that are making about Forty/Thirty thousand dollars after taxes per year this number is close to zero. Most people when they start to make good money, they just spending it all. Happens very commonly among people I know, and it’s just really unfortunate because I know that they’re smart and they know what they’re doing but they just keep doing it anyways. They’re not putting any money towards any sort of investing for the future to make their lives better in the future.
So this is why this is important here as this will make your life better. You might like and enjoy the consumer stuff you’re buying a TV, or a nice fresh haircut or go on a vacation – all these things will make your life better for a very short period of time. But putting your money in here, especially in the 20% bracket, will make you wealthy over time. So that you don’t have to worry about money ever again and you can then eventually one day you can buy anything you want.
Question is, are you willing to put off that temporary satisfaction of your wants and even cut down on your needs? Perhaps take a cheaper house?
What do you think your income distribution is currently? Are your needs at Seventy percent or at eighty percent and your wants at Ten/Twenty. Or are your wants at fifty percent? Use this 50/30/20 rule to learn how to save money the right way. If so then you haven’t been following the blog enough. Or at least you haven’t been taking action about it!