The 50/30/20 Strategy of Personal Finance Budgeting

​Budgeting money properly ensures that food, housing, entertainment, health care, insurance, and tax expenses are covered. One pathway involves adhering to a 50/30/20 rule, which allocates half of the budget toward immediate needs, including minimum debt servicing on mortgages and credit cards. Another 30 percent goes toward wants and non-essentials, such as travel, eating out, and concerts. The remaining 20 percent is committed to savings and making debt repayments beyond the minimum.

Determining the exact amounts that fit into each category involves calculating after-tax income. This is often accomplished automatically through company withholdings in the paycheck. However, those who work independently must calculate taxes and business expenses on their own.

One of the advantages of 50/30/20 and similar budgeting approaches is that it provides a substantial buffer in the form of discretionary spending. In cases of below-average monthly earnings or unexpected expenses, such as medical bills, one can dip into the 30 percent “wants” portion for a time. Tightening the belt on recreational activities or finding free community-based alternatives helps many people get back on track and achieve a balanced and expanding budget. One thing to avoid, unless necessary, is drawing from the 20 percent that represents retirement and emergency fund savings.

Jim Peters financial advisor

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