50/30/20 - Needs/Wants/Savings

The 50/30/20 finance principle is a financial management guideline that suggests dividing your after-tax income into three categories: needs, wants, and savings. This principle was popularized by Elizabeth Warren, in her book "All Your Worth: The Ultimate Lifetime Money Plan." I also advocates for this principle and recommend it to my clients.

In this article, we will discuss the 50/30/20 finance principle, its benefits, and how to apply it to your personal finances. We will also provide examples in euro to help you understand how to allocate your income according to this principle. What is the 50/30/20 finance principle? The 50/30/20 finance principle is a simple and effective way to manage your finances. It suggests that you should divide your after-tax income into the following categories:?

Needs (50% of your income): This category includes all the essential expenses you need to survive, such as rent/mortgage, utilities, groceries, transportation, insurance, and minimum debt payments.

Wants (30% of your income): This category includes all the discretionary expenses that bring you happiness and pleasure, such as entertainment, dining out, travel, hobbies, and fashion.?

Savings (20% of your income): This category includes all the money you save for your future financial goals, such as emergency fund, retirement, education, or down payment on a house.

What are the benefits of the 50/30/20 finance principle? The 50/30/20 finance principle has several benefits, including:?

Simplicity: The principle is easy to understand and apply. It doesn't require complex calculations or financial knowledge.?

Flexibility: The principle allows you to adjust your spending according to your income and priorities. You can increase or decrease the percentages depending on your needs and goals. Balance: The principle promotes a balanced approach to money management. It ensures that you cover your needs, enjoy your wants, and save for your future.?

Discipline: The principle encourages you to prioritize your spending and avoid overspending on unnecessary expenses. It also motivates you to save regularly and consistently.?

How to apply the 50/30/20 finance principle? To apply the 50/30/20 finance principle, follow these steps:

Step 1: Calculate your after-tax income

The first step is to calculate your after-tax income. This is the amount of money you receive after deducting taxes and other mandatory deductions from your gross income. You can find this information on your payslip or bank statement.

Example: Let's assume your after-tax income is €2,500 per month.

Step 2: Allocate 50% to needs

The second step is to allocate 50% of your after-tax income to needs. These are the essential expenses that you must pay to live a decent life. Examples of needs include rent/mortgage, utilities, groceries, transportation, insurance, and minimum debt payments.

Example: You allocate €1,250 per month to needs.

Step 3: Allocate 30% to wants

The third step is to allocate 30% of your after-tax income to wants. These are the discretionary expenses that you can live without but bring you pleasure and happiness. Examples of wants include dining out, entertainment, travel, hobbies, and fashion.

Example: You allocate €750 per month to wants.

Step 4: Allocate 20% to savings and debt reduction

The fourth step is to allocate 20% of your after-tax income to savings and debt reduction. These are the financial goals that you want to achieve in the future, such as building an emergency fund, saving for retirement, paying off debt, or investing in your education or business.

Example: You allocate €500 per month to savings and debt reduction.

Step 5: Track your expenses and adjust accordingly

The final step is to track your expenses and adjust your budget accordingly. This means keeping a record of your spending in?each category and making sure that you stick to your budget. If you find that you are spending too much on wants or not saving enough, you may need to adjust your allocations. It's important to be flexible and make changes as your financial situation and priorities change over time.

Example: You track your expenses and find that you are spending more than 30% on wants, so you decide to cut back on dining out and entertainment and increase your savings allocation to 25%.

Joe Murphy’s tips to help you apply the 50/30/20 finance principle:

1.?????Review your expenses: Take a closer look at your current expenses and identify where your money is going. Categorize your expenses as needs, wants, or savings. This will help you understand where you need to make adjustments to align with the 50/30/20 principle.

2.?????Set realistic goals: Determine your financial goals, such as building an emergency fund, paying off debt, or saving for retirement. Set realistic goals that align with your income and expenses.

3.?????Prioritize your needs: Ensure that your essential expenses, such as rent, utilities, and groceries, are covered first. Prioritizing your needs ensures that you can maintain a decent quality of life.

4.?????Look for ways to cut costs: Look for ways to reduce your expenses, such as negotiating bills, buying in bulk, or finding cheaper alternatives for discretionary expenses.

5.?????Automate your savings: Set up automatic transfers to your savings account to ensure that you save consistently and regularly. This also removes the temptation to spend the money on discretionary expenses.

6.?????Be flexible: The 50/30/20 principle is not set in stone. Adjust your budget as needed to accommodate changes in your income or expenses.

7.?????Track your progress: Monitor your expenses and savings regularly to ensure that you are on track to meet your financial goals. This will also help you identify areas where you may need to make adjustments.

Conclusion

The 50/30/20 finance principle is a simple and effective way to manage your finances. By allocating 50% to needs, 30% to wants, and 20% to savings and debt reduction, you can achieve a balanced and disciplined approach to money management. Remember to be flexible, track your expenses, and make adjustments as needed to reach your financial goals.