How to manage your money

How to manage your money, 50/20/30 principle

Let’s talk about what personal finance is, and more specifically about the 50/30/20 rule.

Your full income of money is 100%. And 50% of those will go to your needs. This is all about budgeting and understanding where all your money is going in an ideal, personal budget portfolio. So, 50% are ‘needs’, 30% will go to ‘wants’, and 20% will go to ‘savings.’

Now, let’s dive deeper to understand each one of those categories. Keep in mind we would be giving examples in after tax income – which means net income, you will have some gross pay, but in the end what matters is the money you take home – your net income.

1. So - 50% of the income will go to ‘needs.’ Those are:

  • Groceries
  • Housing
  • utilities
  • Health insurance

Literately – ‘need’ means something you really can’t live without or something that will greatly inconvenience you, and even the lack of it harms you.

2. The next area is ‘want.’ Let’s see what we consider as ‘wants’, as we will put 30% of our income there. There is a great difference between ‘need’ and ‘want’, and you should always try to understand it. Simply put – ‘want’ is everything you desire but can live without it. Or something that causes mild inconvenience in your life. It’s not necessarily a matter of survival if you give up on something you want.

  • Shopping – e.g., new pair of shoes, or modern clothes.
  • Dining out – it’s easier for most of the people in the US to buy dish, than cook themselves
  • Hobbies – everything you do for fun and not earn money with it

3. The last 20%, although it sounds basic, should go to ‘savings.’ Or paying off debt. Examples:

  • Emergency fund (6-12 months of living expenses).
  • Credit cards
  • Student loans
  • Deposits
  • Retirement plan
  • Investments

You might be thinking, you know all of that but until you sit down and write down the 3 categories and track monthly your spending – you will not be able to get the full picture and make corrective adjustments in order to be able to save more money and achieve your financial dreams.