Coffee Break Risk & Finance

The Best Way to Divide Your Paycheck

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It’s payday. You now have a lump sum of earnings that you need to divvy up to handle your expenses for a stretch of time. Depending on your pay period, this could be a week, two weeks or even a whole month. What’s the best way to divide your paycheck?

A popular strategy is to follow the 50-30-20 rule. This could be the best way to divvy up your paycheck earnings.

What Is the 50-30-20 Rule?

The 50-30-20 rule is a formula for budgeting your earnings. The formula encourages you to use 50% of your earnings for your needs, 30% for your wants and 20% for your long-term financial goals.

50: Your Needs

The biggest part of this budgeting formula is dedicated to your needs. You might also call these your essential expenses — these aren’t expenses that you can opt out of in hopes of saving money or making other purchases.

These are some of the expenses that would be considered “needs”:

  • Housing (mortgage/rent payments, property taxes, fees)
  • Insurance (homeowners insurance, health insurance, car insurance)
  • Utility bills (electric, gas, water, internet, etc.)
  • Groceries
  • Transportation (car payments, gasoline, transit passes)

These needs vary from person to person. If you’re a parent, childcare expenses like daycare and afterschool programs could be considered one of your “needs.” If you have a dog, expenses like pet insurance and doggy daycare could be considered needs. Take a look at your monthly expenses and ask yourself which ones you can’t forego, not even when you have to tighten your belt. These are your essentials.

30: Your Wants

The next part of the formula is for your wants. These are considered non-essentials that you want to buy but don’t necessarily need to buy. You prioritize them because they make your life more enriching and enjoyable.

These are some of the expenses that would be considered your “wants”:

  • Gym memberships and fitness classes
  • Grooming (haircuts, manicures, pedicures, etc.)
  • Streaming services
  • Dining out
  • Movie tickets

Don’t dismiss the importance of this category. While you technically can live without “wants,” you shouldn’t eliminate this entire category in the hopes of saving more money.

Why? Not budgeting for any wants will make your day-to-day life very restrictive and unfulfilling. You’re bound to experience a breaking point and rebel against the boundary you set for yourself — potentially going on spending sprees that you can’t afford to make and that could put you into financial trouble.

Instead of setting yourself up for failure, acknowledge your need for fun and budget for non-essentials in a sensible way. Thirty percent of your income is plenty of money to work with.

20: Your Financial Goals

The final 20% of your paycheck should go toward your financial goals. While these “expenses” aren’t immediate necessities, they will help you in the long run.

For instance, one of the financial goals you could dedicate part of the 20% to is an emergency fund. An emergency fund is a collection of personal savings that you can withdraw from whenever you encounter an urgent, unplanned expense.

Without an emergency fund, you might not have an easy way to handle that expense. You will have to find another solution. You could use one of your credit cards to pay for it. Or you could go to a website like CreditFresh to apply for a fast loan online (as long as you meet all of the application requirements, of course). If your application gets approved, you’ll receive the fast online loan, which you can then use to cover the urgent expense in a short amount of time. Once it’s paid off, you can repay the online loan through a monthly billing cycle and move forward.

Other than an emergency fund, these are some other financial goals you can address:

Will this formula work for you? There’s only one way to find out. The moment you get your paycheck, give the 50-30-20 rule a try.