This week the 30 & 20%…
Limit Your “Wants” to 30 Percent
This sounds great on the surface. Can you put 30 percent of your money toward your wants? Hello, shoes, weekend trip to Tobago, liming every Friday?
Not so fast. Remember how strict we were with the definition of a “need”? Your “wants” don’t include extravagances. They include the basic niceties of life that you enjoy, like that unlimited text messaging plan, your home cable bill, and cosmetic (not mechanical) repairs to your car.
Spend 20 Percent on Savings and Debt Repayments
Now about the extra $200 you pay on that credit card each month. That’s neither a want nor a need. It’s the “20” in the 50/30/20 rule. It’s in a class all its own.
You should spend at least 20 percent of your after-tax income repaying debts and saving money in your emergency fund and your retirement accounts. If you carry a credit card balance, the minimum payment is a “need” and it counts toward the 50 percent. Anything extra is an additional debt repayment, which goes toward this 20 percent category. If you carry a mortgage or a car loan, the minimum payment is a “need” and any extra payment count toward “savings and debt repayment”.
An Example of the 50/30/20 Plan
Let’s say your total take-home pay each month is $3,500. Using the 50-30-20 rule, you can spend no more than $1,750 on your needs per month. You probably can’t afford a $1,500-a-month rent or mortgage payment, at least not unless your utilities, car payment, minimum credit card payments, insurance premiums, and other necessities of life don’t exceed $250 a month.
If you already own your home or you’re locked into a lease, you’re pretty much stuck with that $1,500 payment. Consider relocating when your lease expires to make your budget more manageable or take a look at your other “needs” to see if there’s a way that you can reduce any of them. Maybe shop for more affordable insurance or transfer the balance on that credit card to one with a lower interest rate so your minimum payment drops a bit. Your goal is to be able to fit all these expenses into 50 percent of your take-home after-tax income.
You can spend $1,050 a month on your “wants” based on that $3,500 you’re bringing home each month. You might consider doing without a few things and shifting some of this money to your “needs” column if you’re coming up short there—not necessarily indefinitely but until you can get your needs down to a more manageable level.
Remember, you still need 20 percent left over so you can save and pay down your debts according to the 50/30/20 plan.
Now you have $700 left, that last 20 percent. You know what to do with it. Pay down on debt, save for an emergency, and plan for your future.