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Make the Right Money Moves

You’ve heard about the 50-30-20 rule, right? Well, if not, you’ll learn this very useful budget rule today. US Senator Elizabeth Warren wrote a book where she talks about the so-called “50/30/20 budget rule”. The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement, and it is an intuitive and simple plan to help people reach their financial goals.

The rule states the following:

  • 50% Needs: 50% of your after-tax income on needs and obligations that you must-have or must-do. This includes things that are necessary for survival. These include rent payments, health care, groceries, insurance, and essential utilities.
  • 30% Wants: Wants are the things you spend money on that are not absolutely essential. This includes holiday, going out for dinner, getting tickets to sporting events, going to the cinema or getting upgrades such as buying a fancier car. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
  • 20% Savings: Finally, allocate the remaining 20% to savings, investments and debt repayments. This includes adding money in a bank savings account and emergency funds. You should try to have at least three months of emergency savings on hand in case an unforeseen event occurs, such as you losing your job. After that, prioritize retirement and meeting other financial goals down the road. Note that if emergency funds are ever used, the first allocation of additional income should be to replenish the emergency fund account.

Bottom Line:

Saving is difficult and life should be enjoyed, but having a plan and sticking to it will allow you to cover your expenses, save for retirement, all at the same time doing the activities that make you happy. There’s also a “70/20/10 rule” which basically says you should allocate 70% of your monthly income to spending, 20% to saving and 10% to giving and or paying off debts. We’ll save this rule for another day.

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