Understand Your Finances
Budgeting your money using the "50/20/30" rule
Chase is sponsoring GOOD Money to help shape your financial future, at every step as you move from the haze of student debt toward the horizon of retirement. We are here to help the young and ambitious understand what the world of money is going to look like in the years ahead.
The 50/20/30 Rule is a simple way to allocate your money and use it wisely. Following this rule—if your situation allows for it—can be helpful for someone who is just starting to learn how to manage their money. Research shows that 66 percent of Americans do not set a budget for themselves, but setting a budget is important for long-term financial health.
According to the 50/30/20 rule, you should divide your money into three categories upon receiving a paycheck: your essential needs, savings and debts, and wants.
50 percent: Your needs.
50 percent of your paycheck should be set aside for the essentials, the core things you need to live. These include utilities, groceries, and rent, prescription medications, gas for your car, or the minimum payment on your credit card.
It is important to understand what is considered a "need" vs. a "want" in order to properly budget your money. Any payment that could negatively impact your quality of life—or your credit rating—should be treated as a need.
20 percent: Your savings and debt.
The next 20 percent of your paycheck is for your savings and debt repayments. In other words, paying off the past and investing in the future.
Student loans, credit card payments, and retirement accounts all fall under this category. This 20 percent also includes investments or other financial goals.
Simply setting aside 20 percent of your income for savings can quickly build a safety net in case things go south and expenses increase.
30 percent: Your wants.
The remaining 30 percent should be spent on things that you want but could live without. This 30 percent allows for flexible spending and, perhaps, a happier life.
This could include money for vacations, shopping sprees,or a car you really covet. But remember, these "wants" include all things that aren't needed to stay afloat, so be sure to prioritize.
The 50/20/30 Rule offers flexibility and security. These percentages serve as a general guideline and can be adjusted, depending on your lifestyle. Whatever ratio you choose, though, remember that making a budget is useless unless you stick to it.
Casey Weber is a Chase News contributor.