Senator Elizabeth Warren popularized the 50/20/30 budget rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” The basic rule is to divide after-tax income, spending 50% on needs and 30% on wants while allocating 20% to savings.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent, car payments, groceries, insurance, health care, minimum debt payment and utilities. The “needs” category does not include items that are extras, such as Netflix, Sheesha, IPhone and dining out.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronics gadget and ultra-high-speed Internet. This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive homemade meal, buying a Mercedes instead of a more economical Honda or choosing between watching television using cheaper cable for way less than spending money on Netflix. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
Allocate 20% of your income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making contributions to a mutual fund account and investing in the stock market, forex or gold.
Savings can also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce principle and future interest owed, so they are savings.
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