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How The 50-30-20 Rule Can Help You On Your Journey To Financial Success

Finances FYI Presented by JPMorgan Chase

By Aaron Allen, The Portland Medium

JPMorgan Chase continues its campaign in educating the community about fiscal responsibility. The campaign introduces ways for families and individuals to establish diverse methods for saving and budgeting their money.

According to Paul S. Butler, Vice President and Community Manager of Community & Business Development for Chase, having a plan for your money is crucial for building a solid financial foundation. If you’re just starting your financial journey, Butler suggests applying the 50-30-20 rule to help you spend and save your money wisely.

“There are several ways of saving,” says Butler. “Obviously, budgeting and this [the 50-30-20 rule] is just one form of budgeting. It’s not one size fits all, and it is just one example of trying to budget and work ways of working your money.”

By distributing your income into three main categories or buckets—needs, wants, and savings—the idea is to limit fixed expenses (or needs) to 50% of your after-tax income, discretionary expenses (or wants) to 30%, leaving 20% for savings.

“The 50-30-20 rule isn’t a requirement but can be a great starting point to help you take control of your finances, plan your spending, and progress towards your financial goals,” says Butler. “It can be kind of rough in the beginning, and there needs to be adjustments that are made in terms of your budgeting, but I think it is a good rule that you can utilize to really make sure that you are on track with your budgeting.”

50: What are your needs?

In this bucket, half of your funds go toward paying expenses you can’t avoid. We all need food, housing, and healthcare, and other needs that could include transportation, clothing, and utilities. Regular debt payments, like monthly credit card minimums and loan payments, would also be considered a need because you have a deadline to pay them each month.

“What makes something a ‘need’ versus a ‘want’ depends on your lifestyle,” Butler explains. “Transportation is typically considered a need, but the type of transportation you select might vary depending on where you live. Having a vehicle may be a legitimate need to get to work and earn money to pay bills, but consider whether you need a luxury car, or if something less expensive would work.”

According to the plan, there is also a need for food and clothing, but funds spent on these two categories can flow into the ‘wants’ bucket depending on your choices, such as dining out versus cooking at home or wearing designer gear versus department store basics.

30: What do you want?

Everyone should be able to enjoy life’s simple pleasures, and maybe a few extravagant ones as well. Put aside 30% of your funds for these ‘wants,’ which can include entertainment, cable/streaming services, dining out, fitness memberships, travel, hobbies, personal care beyond the basics, and a cell phone beyond the basic plan.

Overspending can be common in this category since it’s fun to spend money on things we enjoy. With that in mind, Butler says it’s always a good practice to take some time to prioritize your most important wants and desires and cut back if you find your spending in this category goes over 30%.

“I know a lot of people get confused in terms of wants and needs when it comes to clothing and food,” says Butler. “Obviously eating at McDonald’s is not a need, that’s a want. So, we have to be careful when we think about ‘wants and needs’ when it comes to essential items. On the 30% part, you have to ask yourself what do you want? In other words, everyone should be able to enjoy life, simple pleasures and maybe a few extravagant ones as well. So put aside 30% of the funds and these are for your wants.”

20: Save for the future

This category is all about what you want to do with the money in the future. Do you want to travel the world? Retire early? Help your children pay for their education? Once your essential needs and desires are met, you can save the rest of your funds, your 20% toward achieving long-term goals.

“20 percent, this is where you do your savings part of it,” says Butler. “So, this category is all about what you want to do with the money in the future. So do you want to help your children pay for college, retire early, travel the world? Once your essential needs and more immediate wants are handled, you can put the rest of your 20% towards achieving your long-term goals.”

If you want to pay off debt more quickly, beyond making your ongoing required payments, Butler says that you can use money from this bucket to speed up the process.

“Paying off debt more quickly, beyond making those critical payments, mortgage, car notes, etc., you can also utilize your 20 percent for this bucket to help speed up your saving plan as well,” Butler adds.

Refilling your buckets

Once you’ve given this rule a try for a few months, you might notice your spending and savings habits fall outside of the 50-30-20 guideline. That’s when, according to Butler, it’s time to make some trade-offs.

“Be honest about whether the items you’re putting in the needs category are vital to your life or if you could classify some or all those expenses as a want,” Butler advises. “It’s OK to spend more on housing if having a more expensive place is important to you; it just means you spend less on a car to balance things out.”

“If your wants are way beyond 30%, consider scaling back and contributing more to saving for long-term goals,” adds Butler. “In the same vein, if you don’t have 20% leftover after spending on needs and wants, consider making some adjustments in your other buckets so you have enough for savings.”

Tying it all together

The 50-30-20 rule can help you allocate your money to needs, wants, and savings and offer insights into where you may need to cut back, and you can use it to help you on your journey to financial success.

“I would just say try it,” says Butler. “Like I said, one size does not fit all. It’s not a perfect science but if you’re in a position where you need to start budgeting and you’re trying to figure out behaviors to figure it out, this is one way of doing it. And again, I would just say practice it, utilize it and if it doesn’t work out for you, you can always Google other budgeting tools as well.”

For more saving tips, visit chase.com/personal/financial-goals.

For informational/educational purposes only: Views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for any individual. Information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy.

Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.