Stop Budgeting Blindly: The 50/30/20 Rule + Your Emergency Escape Plan

📆This Week’s Topic

This week I want to discuss 2 very important budgeting categories. Basic rule of budgeting (the 50/30/20 rule) and the concept of an emergency fund. I am going to discuss these two topics, their importance in your finances, and how they connect to each other.

💳 Intro to the 50/30/20 rule

The 50/30/20 rule is a budgeting rule to make sure you are saving enough, and you are spending enough on wants and needs. The 50/30/20 rule means that you allocate 50% of your income towards needs, 30% towards wants, and 20% towards savings. This is a very common budgeting trick although lots of people consider it to be no longer accurate.

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🏦 Intro to Emergency Savings

Everyone saves for the things they are preparing for like a trip to NY, a new car, or some other planned expense. But, it is also worthwhile to save for things you aren’t planning. For example, you may have your car alternator break down and need to pay $400. If you build up an emergency fund it can allow you to expect the unexpected expenses so you don’t have to go into debt to pay for a car alternator.

🔚 Emergency Savings Deep Dive

Emergency savings is really important to make sure you always have money in case there is a large unexpected expense. An emergency fund is traditionally comprised of 3-6 months of living expenses (If your living expenses are $3,500 per month your emergency fund should contain $10,500 - $21,000. This will make sure that if you get fired, need to repair your home, or any other unexpected expense you will be prepared to pay for it. There is some debate about how much your should have in your emergency fund but the upper part of the 3-6 months of expenses is a good number to live by.

💵50/30/20 Rule Deep Dive

As mentioned previously, the 50/30/20 rule means that you set aside 50% of you income towards needs, 30% towards wants, and 20% towards savings. This allows you to steadily grow your savings and keep you needs in check. Although, There is a debate going on about whether this rule is still accurate. This is because of the needs section, the rule of thumb is that normally your rent should not cost more than 25% of your income. But, with the average rent being nearly $2,000 a month, this may not be true. We might have to alter the 50/30/20 rule to 60/20/20. But, just remember if you use this rule shape it to however you need, just try to save/invest 20% of your income each month.

🔗How Both Topics Connect

These topics connect because the 50/30/20 rule is a framework that helps you manage you money by saving enough each month, not spending too much on wants or needs, and make your budgeting easier. An emergency savings account is an account to keep money in case something unexpected happens. I combined these too because the 50/30/20 rule shows you that you should be saving at least 20% of your income each month. For example, if you make $4,000 a month as take home pay you should save $800 per month. These both talk about the importance of savings and how that can effect you.

⏳ Final Summary

So in summary, both to 50/30/20 rule and emergency funds are very important aspect of savings and budgeting. It is really important because it can help you save more. In summary, in an emergency fund is a fund with 3-6 months of living expenses used it case of an unexpected expense. The 50/30/20 rule is putting aside your paycheck to 50% needs, 30% wants, and 20% savings.

🙏Thank You & Important Information

Anyway, thank you so much for reading this edition of Friday Finance. I am grateful that you guys are such loyal subscribers and you are reading my stuff.

Jacob Gans

Friday Finance