This story is part of the CNBC Make It’s One-Minute Money Hacks series that provides simple, straightforward tips and tricks to help you understand your finances and take control of your money.
Here’s how to use the 50-30-20 budgeting strategy
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Managing your finances and setting a monthly budget can be a challenge.
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However, if you don’t know where to start, the 50-30-20 strategy can make the process easier.
The plan divides your income into three broad categories: necessities, needs, and savings and investments. Here’s a closer look at each.
50% of your paycheck should be used for things that you need
This category includes all essential costs such as rent, mortgage payments, groceries, utilities, health insurance, debt payments, and car payments.
If your necessary expenses are more than half of your income, you may need to cut costs or dive into your desired funds.
20% of your paycheck should be used for savings and investments
This category includes liquid savings such as an emergency fund; Retirement assets such as 401 (k) or Roth IRA; and all other investments, such as B. a brokerage account.
Experts usually recommend having enough cash in your emergency fund to cover living expenses between three and six months. Some also suggest building your emergency savings first and then focusing on long-term investments.
And if you have access to a 401 (k) account through your employer, this can save you some of your pre-tax income.
30% of your paycheck should go to the things you want
This last category includes anything that is not considered a substantial cost, such as: B. Travel, subscriptions, dining, shopping, and fun.
This category can also include luxury upgrades: if you buy a nicer car instead of a cheaper one, for example, it falls into your desired category.
There’s no one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and wondering how to split your income.
Check out: Meet the Middle Aged Millennial: Homeowners, In Debt, and 40 Years Old
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