Budgeting 50-30-20 Strategy and Cash Flow

Posted on by

Managing your money and tracking your finances is essential in building wealth, but it doesn’t have to be complicated or painful process. It can be as simple as creating a budget. And, a budget starts with listing of your income and your expenses.

One simple strategy for tracking your personal cash flow (income and expenses) is the 50-30-20 budgeting strategy. With this budgeting strategy, you divide your income into three broad categories: necessities, wants, and savings and investments, according to those ratios.

—- 50% of your income should go toward things you need

This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments.

If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

—- 20% of your income should go toward savings and investments

This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account.

Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses. Some also suggest building up your emergency savings first, but, you don’t just want to save this money.

You want to invest it and make it work for you. That means contributing to your employer’s 401(k) plan if they offer one or saving in other retirement accounts, such as a Roth IRA or traditional IRA.

—- 30% of your income should go toward things you want

This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun.

This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

But think about what matters to you before spending this money. As research shows, how you spend is oftentimes more important than your overall income or the amount you spend in total.

Money experts suggest you spend on experiences, such as trips or classes, rather than things. “All of the best psychological research on money and happiness tell us that spending money on experiences brings more (and more lasting) happiness than spending money on material objects,” says Ron Lieber, New York Times columnist and author.

There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

References:

  1. https://www.cnbc.com/2021/06/25/best-free-budgeting-tools-2021-how-to-make-your-own-spreadsheet.html
  2. https://www.cnbc.com/2021/05/11/how-to-follow-the-50-30-20-budgeting-strategy.html
  3. https://www.cnbc.com/2019/07/22/use-the-50-30-20-formula-to-figure-out-how-much-you-should-save.html
Advertisements