How To Manage Your Money: The 50/30/20 Rule

all right so in today's video I'm gonna share something called the 50 30 20 rule of money this is a very important concept to understand especially if you've ever found yourself in a position where you want to save more money or you want to invest more money but you're just not really sure where that's going to come out of your budget how you're going to be able to start doing this more putting in 20 30 40 percent of your income and finding a way to start saving investing more so that potentially you can retire earlier you can afford to pay for your kids college you can afford to buy a new home in the future so there's a lot of reasons why we'd want to save and invest money but let's talk about this rule of money very important understand and I think a lot of people are going to find some value in this and if you do make sure you subscribe to the channel drop a like on the video we would appreciate it help support the channel for the algorithm so that it's pushed out to more people and let's just get started with this so the 50 30 20 roll of money it's been around for quite some time and for the most part it's a really really helpful idea and tool that you can use in order to build wealth now there are some critiques that I'm going to leaving here throughout this video towards the end I'm going to talk about some downsides to it and some things that you want to just be very careful of if you're going to follow this strategy but overall it's definitely something that in most cases is going to put you in a much better financial position than you would be otherwise if you weren't using this so the first thing we need to do in order to use this rule of money is we need to calculate our post tax income so to do this simply just look at your pay stub look at how much money is coming into your bank account after taxes so you're probably going to be getting taxed before so your employer is going to be withholding a certain amount of money for taxes and you put that aside and then you get a certain amount of money in your bank account so if you're making forty-five thousand dollars per year you might only see thirty five thousand dollars per year actually coming in to your bank account thanks to Uncle Sam and the government for taxing us right so what you're gonna do then is add back any non tax deduction so health care or if you've been making deductions for 401ks or IRAs or some other type of retirement accounts then add that back into this equation just to give us this example number that we're going to talk about how we can use this fifty thirty twenty rule and then finally you want to be you want to make sure that you are running a budget really at all times so I have a free budget template down in description below there's no catch it's just a free Excel template that I may it's pretty simple to use but it's going to help you track where your money's coming in and where it's going out so that you're able to really see where you stand financially once you do these three things that's when we can actually start talking about the 50 30 20 will of money so the first thing that we need to understand here is that this 50 stands for 50% of your money goes towards your needs now this is a guideline this isn't to say that this is exactly what you should be at at the moment but more so something that you should be shooting for and hoping to get your needs down to about 50% of your income now the truth is if you're making $7.25 an hour it might be very difficult to get your needs down to 50% of your after-tax income so if you're making fifteen twenty thirty dollars an hour it might be a little bit more possible to do this depending on where you're living at the moment but the idea here is that 50 percent of your income is going towards needs now I want to very much clarify what we mean when we say Mead so we're talking about putting a roof over your head we're not talking about the best school district in the county we're not talking about a really nice condo somewhere we're talking about something that gets a roof over your head that counts as a need okay the next one food look some people spend a lot of money on food we're not talking about restaurants this is under the needs category so this is food such as groceries that are very important to survive we obviously all need food we need shelter to survive right so these two are very important health care this is something regardless of your income you should not be skimping on because the truth is if we don't have good health we're probably act me around for a very long time so take good care of yourself this absolutely goes in the needs category utilities not getting your power shutoff not getting your water shut-off not getting evicted from your home so these are all very important things that are needs and then also we throw in here minimum debt payments as a need as well so when we say this look the problem with this is that you could have maybe bought a TV with your credit card but you have them in one payment on this well the TV is not a need but I need is to pay off that minimum payment on the credit card at the very least so we do throw that into the needs category for this and it is something that's very important going along with this for the minimum debt payments is if you have student loans if you have a all these things that are going to affect your credit score if you don't pay them you essentially default on the loan that's very very bad news you don't want to find yourself in that position so we're throwing that under needs as well for minimum payments so those things right here are going to be classified as needs try your best to get these down and look we have videos on all of these topics we have videos I just made a video about how you can save money on groceries we're coming out with a new one on how I spend between forty to fifty dollars per week on groceries at the most so if you're interested in those make sure you are subscribed the channel with the bail notification icon so you don't miss those videos but we've talked about how to save money with housing we've talked about how to save money with these other things as well as well as transportation we'll talk about that in the future whether that's a need versus a want depends on your situation but let's keep moving on here all right so now according to the fifty thirty twenty rule thirty percent of your income should be going towards your wants there is a very large difference between needs and wants and hopefully we're clarifying that in this video but as far as wants go look clothing I would classify this for the most part as a want now obviously you shouldn't be running around downtown completely nude just and running through the street you're probably gonna get arrested right you don't want to do that but the truth is clothing it doesn't have to cost a lot of money if you weren't in a financial pinch you can go to 50 Cent's Sunday at Goodwill or Salvation Army and get some clothing for fifty cents for a couple of dollars you get some clothes so for the most part clothing I would classify it as a want there is a very small need for clothing you could budget some of that infinity to maybe twenty dollars a month for the essentials for clothing but the truth is you can get that down very very low and for the most part clothing it's going to be a want in a lot of cases now phones as well this is something that is not necessary to keep you alive it's not necessary to keep you off the streets so therefore phones and phone bills these are classified as a one even though this might be something that's pretty important in life you really everybody has a phone and in some cases you can't even really function without your phone you go to some places and they say well we only accept phones for this or you can only use the app and eventually you think about phones in the future we don't want to go off on a tangent here but you think about phones in the future I mean you might not even be able to call a taxi if you don't have a phone and it's all Ebers you have to have an uber app if you don't have your phone what are you it's a weird situation but anyway let's talk about the next year restaurants ok if you're gonna have to eat this is a one this is an obvious want it's not groceries it's not paying for bread and rice and beans and potatoes and and vegetables and fruits but it's it's things that you're paying the chef to make you food so this is money that is classified as a want as well as entertainment and vacations now it's not to say that you should not be spending money on these like 30% of your income can go to these under this specific rule the 50 30 20 rule but you don't want to end up like this guy over here where you're just doing absolutely nothing I don't even know why I drew him on there but essentially he's pretty bored he's got nothing going on and he's saving all of his money and not doing any of these and that kind of sucks okay so put about thirty percent towards your wants and you can change this a little bit you can tweak it we're going to talk about that in the next coming minutes here but find things really this can add up a lot this really can because you think about all these small things that you don't absolutely need maybe you want to furnish your apartment you got a new apartment right I just moved in and there's a lot of things that you realize if you want a bed frame that could be 100 some dollars would be $200 you want a new mattress you want some furniture you want to get a couch you want to get certain types of things for your kitchen you want to get a really nice blender these things add up quite a bit and your wants you're gonna find that they're filled very quickly but do an audit on yourself track your budget and see how much is going towards your wants right now versus how much is going towards your needs and then let's talk about the final one here which is going to be 20% going towards savings and investments now the trip says I really like to flip these around so for myself I find myself saving way more than 20% of my income and investing way more than 20% of my income but this is a good rule of thumb and you know for people who if you find yourself making say $30,000 per year then you would split this down into a very simple thing so for 50% of your money if you're making $30,000 per year after taxes you would say that $15,000 of that money and goes towards your needs over the course of the year remember the definition of needs 30% of that $30,000 goes towards your wants so $9,000 and then savings and investments including your IRA your 401k you'll retire accounts all these things are included under savings and investments but if you can get to at least 20% I would argue that you would likely be in a much better financial position than most people today the truth is most Millennials are not anywhere near this percentage here and even if you're just sucking money into your 401k or maxing that out you're probably not always but truth is you're probably going to be in a much better financial position obviously we can't predict exactly what's going to happen in the stock market or in the markets in general but for the most part they do go up now a debt repayment we can put this into the savings and investments because really when you look at whether you should pay off debt or invest I'd like to think of both of these really as something that is beneficial for your finances overall so we can put it in this and then the emergency fund as well we talked about this why it's important to have at least close to six months worth of emergency fund that you can live off of if you get laid off from your job if something happens if you have to pay some very expensive medical bills these are all incredibly important so that is the 50 30 20 rule personally what I would try to do is if you're making over $50,000 per year after taxes and you're not living in an expensive city like New York or San Francisco so if you're making over $50,000 per year after tax I would try to really switch these numbers around and go the 50 20 30 rule rather than the 50 30 20 rule so take 20% for your wants and 30% for your savings and investments and just this little tweak can quite literally shave off years off of your projected retirement dates so that instead of retiring at age 63 like the average American you might be able to retire at age 55 maybe even age 50 or earlier in some cases depending on how much you can get this up but just remember overall look you do want to spend some money on your wants go on vacation sometimes make sure that you're budgeting for that make sure that you are buying things that you do enjoy if you love playing music go buy a guitar okay don't deprive yourself of some of these things but make sure you have this very well laid out so hopefully you found some value in this if you did make sure you let me know down below in the comment section thanks for watching the video I really do appreciate all the support and I really just really like making these videos so thanks for always supporting the channel capably were over 200,000 subscribers it's kind of strange just talking into a camera here and reaches people it's very very weird concept but thanks for watching and I'll see everybody in the next video

Channel: Nate O'Brien

Views: 102,336

Rating: 4.9600616 out of 5

Keywords: 20 rules of money, how to become a millionaire, how to budget, how to budget money, how to get rich, how to invest, how to invest for beginners, how to invest in stocks, how to invest money, how to make more money, how to save money, manage money, money tips, rule of money, nate o'brien, 50 30 20 budget, 50/30/20 budget, personal finance

Id: HWpW50ByRro

Length: 11min 15sec (675 seconds)

Published: Fri Sep 06 2019