Too often, people spend more than they make each month, putting them in debt. Staying on budget can be challenging for some people. A method many people use to stay on budget is the 50/30/20 rule. Senator Elizabeth Warren popularized this method in her book “All Your Worth: The Ultimate Lifetime Money Plan.” The basic rule divides up gross income into three categories: needs (50%), wants (30%), and savings (20%). By limiting your spending into three distinct categories, this rule may help those new to budgeting or people who have found other budgeting methods too complex to follow.
If you find yourself still struggling with debt after implementing this method, contact the debt attorneys at McCarthy Law. We can help you get back on track with your finances and negotiate with lenders to lower your debt.
How Does the 50/30/20 Rule Work?
Before implementing the 50/30/20 rule, you must first determine how much you make after-tax. If you are salaried, you can easily do this by multiplying your paychecks by your pay frequency. You may also look at W-2 forms from the previous year. If you are an hourly employee, finding your yearly earnings may take more time. Start by looking at past pay stubs and determine an estimated amount of hours. Remember, it is always best to estimate lower. That way, you don’t overspend.
Once you determine your after-tax income, you will then need to determine how much money you spend in each category. Doing this will require a deep dive into your spending habits to get a complete picture of where you are spending your money. Let’s examine all three categories further:
Needs are the bills that you must pay every month. These include rent or mortgage payments, car payments, groceries, insurance, health care, and utilities. The category may also expand to include public transportation costs. You should also include your minimum monthly debt payments in this category. Falling behind on debt will only put you in a bad situation in the future.
Overall, half of your after-tax income should go toward your needs. If you are spending more than that, you should look for areas to cut back. This might mean downsizing to a smaller apartment, purchasing a less expensive vehicle, or relying on public transportation.
Items you want will take up 30% of your budget. Items in this category may include gym memberships, vacations, subscription services, and eating out. When you boil it down, anything that is optional will fall into this category. Often, people exceed the amount of money they can spend. If this happens to you, cutting back can help. For example, you can work out at home instead of going to a gym, cook dinner instead of eating out or watch a game on TV instead of buying tickets.
The wants category also includes upgrades from the needs category. For example, a cell phone is a need, but purchasing unlimited data is a want. Similarly, clothes are a need, but buying a designer handbag is a want. Wants are the things that you spend money on to make life more enjoyable.
Finally, the savings category should account for 20% of your income. Build up your savings account to have at least three months of funds on hand in case of an emergency. After that, focus on retirement and other financial goals. You may also increase your savings bucket to 25% or 30% by lowering your wants category.
However, we understand that you may need to pay off some debt first. Remember, minimum monthly payments are a need, but anything extra should come from this bucket. Making extra payments is always a good idea since it will get you out of debt faster and reduce the principal and future interest owed.
Contact the Debt Attorneys at McCarthy Law Today
While the 50/30/20 rule is an excellent budgeting method, it may not be helpful if your debt is out of control. When this happens, contact the debt settlement attorneys at McCarthy Law. Under our settlement program, one of our licensed attorneys will contact your loan lender and begin negotiating to lower the interest and amount owed. At the end of a successful settlement, the borrower typically pays only a fraction of the original amount. To learn more about our services, call (855) 976-5777 or complete our contact form today.