Lesson 2 of 3 · 2 minute read
Needs, wants, and the 50/30/20 guide
How to sort your spending, and why the 50/30/20 rule is a starting point, not a test.
When money is tight, it helps to sort your spending into two groups: needs and wants.
Needs
Needs are things you must pay to live and work. That includes housing, utilities, basic groceries, getting to work, health care, and the Minimum paymentThe smallest amount you can pay on a bill, like a credit card, without being charged a late fee.More in the glossary on your debts. Skipping these can lead to bigger problems, like late fees or losing your car.
Wants
Wants make life better, but you could cut back on them if you had to. Eating out, streaming services, and new clothes you don’t need yet are all wants.
Some things are a bit of both. You need a phone, but maybe not the most expensive plan. Groceries are a need, but snacks and name brands can be a want.
Wants aren’t bad. A little fun money can make it easier to stick to your plan.
The 50/30/20 guide
The 50/30/20 ruleA budgeting guideline that splits take-home pay into 50% for needs, 30% for wants, and 20% for savings and extra debt payments.More in the glossary is one common way to split take-home pay:
- 50% for needs
- 30% for wants
- 20% for savings and paying extra on debt
If you take home $1,800 a month, that’s $900 for needs, $540 for wants, and $360 for savings.
For many people, rent alone takes up most of that 50%. If your needs take 70% or 80% of your pay, you didn’t fail. It just means there’s less room for wants and savings, so every small step counts.
How to find a little room
- Look at your wants. Pick one or two to cut back, not everything.
- Check for subscriptions you forgot about.
- Call your phone, internet, or insurance company. Ask if there’s a cheaper plan.
- Some utility and internet companies offer lower rates for people with lower incomes. It’s worth asking.
Needs are things you must pay to live and work, like rent and food. Wants are things you could cut back on.
Wants are not bad. A little fun money can help you stick to your plan.
The 50/30/20 ruleA budgeting guideline that splits take-home pay into 50% for needs, 30% for wants, and 20% for savings and extra debt payments.More in the glossary is one way to split your pay. It is 50% for needs, 30% for wants, and 20% for savings or extra debt payments.
This rule is a guide, not a test. If needs take most of your pay, you did not fail.
To find a little room, cut back on one or two wants. Ask your phone or internet company about a cheaper plan.