Breaking Down the 50/30/20 Budgeting Method
We talk a lot about personal finance news and how it will affect your wallet. But sometimes, it’s a good idea to check in on your existing budget and see if it could use a makeover. Today, we’re talking about a popular budgeting rule and breaking down the basic principles of how it works.
If you’ve ever done some research into budgeting, you may have heard fo the 50/30/20 budgeting rule. The rule takes your entire after tax income and splits it into three groups. 50% of the income goes to your needs – things you absolutely have to pay for like rent, car payments, groceries, insurance, and utilities. Make sure this category includes your basic needs and must haves, no additional items. After 50% is allocated, 30% of the remainder goes to wants – things like new clothes, dining out, streaming subscriptions, gym memberships, travel, etc. This category should include anything you could cut out of your spending if necessary, so take a good look at the items on your expense list. Finally, we have the remaining 20%. This allocation for the remainder of your funds goes to savings and investments. This would include contributing to your savings account, investing in the stock market, making contributions to your retirement and an IRA, and more.
The Uncommon Cents:
This method makes it super straight forward to get your budget in check and make decisions down the road. Even having a rough guildline for how much you are spending in each category will help. And if your needs category right now is higher than 50%, try making some cut backs to get it there. Pro tip: you can also set up these percentages to go directly into different bank accounts when your job pays you, then have bills deduct from the correct accounts t to keep things super straight forward.
Personal Finance Terms Everyone Should Know
Here are just a few terms to get familiar with. We will continue to add to this list over time.
401(k) – A retirement plan offered by an employer that qualifies for certain tax benefits.
Adjusted gross income (AGI) – Your total taxable income, comprised of your income minus adjustments such as student loan interest and retirement account contributions.
Amortization – The process where amount owed on a loan is reduced over time. Usually, you pay more of the interest up front while repaying a loan, so as you pay your payments go less towards interest and more towards the amount borrowed.
Appreciation – The increase in value of an asset over time.
Asset – Something someone owns that has financial value.
Bear market – A way to describe the stock market when stocks are declining in value overall.
Bull market – A way to describe the stock market when stocks are increasing in value overall.
Capital gains – Profit that results from selling an asset that has appreciated over time.
Commodities – An economic unit that can be bought or sold but the value is stagnant regardless of the seller (like gold or oil).
Credit score – A range between 350 – 850 that is calculated based on your credit history to give lenders a sense of your likelihood to repay debts.
Debt-to-income ratio – The total amount you owe monthly divided by how much you earn each month before taxes.
Depreciation – A decline in value of an asset over time.
Equity – Ownership of an asset after you’ve accounted for the debt outstanding for it.
Fiduciary – A person or organization (like a financial advisor) who is legally bound to act in your best interest when it comes to finance.
Inflation – The percentage that the cost of goods and services increases while the value of money decreases.
Liabilities – Money someone owes to someone else.
Mutual fund – An investment program where many investors contribute to one pot to buy a mix of stocks, bonds, etc.
Net worth – The total value of your assets minus the total of your debts.
Principal – The amount of money you deposit or borrow, not including interest.
Recession – A period of at lease many months where economic activity is declining.
Revolving credit – A line of credit where the amount you can spend is set, and you can pay some or all back to free up more spend power. A credit card is an example.
Spread – The difference between the ask price and the sell price.
Tax credit – A factor set by the government that reduces your final tax bill.
Withholding – The amount of money taken from your paycheck directly based on how many allowances you claim for tax purposes.
Budgeting tip of the day:
Your credit report is updated when lenders report your credit usage and borrowing activities. Some lenders do not report to all bureaus so that is something to keep in mind. You can ask your lenders which credit bureaus they report to.
Credit reports include:
– Your total outstanding debt
– Your history of paying off debt
– Your history of debt payments (on time, late, missed)
– Bankruptcies filed
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