How To Manage Your Money (50/30/20 Rule)

Summary

In this episode of Whiteboard Finance, Marco introduces the 50/30/20 rule for managing personal finances. The rule allocates 50% of after-tax income to needs like housing and groceries, 30% to wants such as dining out and hobbies, and 20% to savings or debt repayment. He emphasizes the importance of distinguishing between needs and wants, and the necessity of budgeting to avoid overspending. Marco also highlights the significance of emergency funds and retirement savings, urging viewers to track their spending to make informed financial decisions.

Takeaways

• 📈 The 50/30/20 rule is a budgeting strategy to manage personal finances effectively.
• 💡 The '50' represents the percentage of after-tax income that should be allocated to essential needs like housing, groceries, and insurance.
• 🛍️ The '30' stands for the portion of income designated for wants, which are non-essential items or experiences that improve life quality but are not vital.
• 💰 The '20' is reserved for savings and debt repayment, emphasizing the importance of financial security and planning for the future.
• 🏠 Essential needs are defined as things that would greatly inconvenience you without them, such as food and shelter.
• 🎬 Wants are items or activities that cause minor inconvenience if forgone, like streaming subscriptions or dining out.
• 🚫 The script highlights the importance of distinguishing between needs and wants to avoid financial strain and debt.
• 💼 An emergency fund, ideally 6 to 12 months of living expenses, falls under the savings category and is crucial for financial stability.
• 📊 Paying off debts like credit cards and student loans is a priority within the 20% savings and debt category to improve financial health.
• 👴 The video stresses the importance of retirement savings, which many Americans overlook, potentially leading to future financial struggles.
• 📝 Creating and maintaining a monthly budget is key to understanding where every dollar goes and staying on top of personal finances.

Q & A

What is the main topic of the video?

The main topic of the video is how to manage personal finances using the 50/30/20 rule.

What does the 50 in the 50/30/20 rule represent?

The 50 in the 50/30/20 rule represents the percentage of one's after-tax income that should be allocated to essential needs.

What are some examples of needs according to the video?

Examples of needs include groceries, housing (rent or mortgage), insurance, and utilities.

What does the 30 in the 50/30/20 rule stand for?

The 30 in the 50/30/20 rule stands for the percentage of one's after-tax income that should be spent on wants, which are non-essential items or experiences.

Can you provide some examples of wants mentioned in the video?

Examples of wants include shopping for non-essential items, dining out, and hobbies.

What is the purpose of the 20 in the 50/30/20 rule?

The 20 in the 50/30/20 rule is meant for savings or paying off debt.

What is an example of a savings goal mentioned in the video?

An example of a savings goal mentioned in the video is building an emergency fund, which should cover 6 to 12 months of living expenses.

What is the importance of the 50/30/20 rule according to the video?

The importance of the 50/30/20 rule is to help individuals understand and manage their money effectively, ensuring they cover their needs, enjoy their wants, and secure their financial future through savings and debt repayment.

What does the video suggest about the common financial mistake of Americans?

The video suggests that many Americans often fail to distinguish between wants and needs, leading to overspending on non-essential items and not saving enough.

What is the advice given in the video for those who want to learn more about personal finance?

The advice given in the video is to create a monthly budget, understand one's monthly net income, and categorize expenses according to the 50/30/20 rule.

How does the video encourage viewers to share the information?

The video encourages viewers to share the information with friends or family members who might benefit from it, without asking for anything in return.

Outlines

00:00

📋 Introduction to the 50/30/20 Budgeting Rule

In this introductory paragraph, Marco from Whiteboard Finance welcomes viewers back and sets the stage for a discussion on personal finance. He mentions a recent poll that indicates viewers' interest in various financial topics, highlighting the significant number of new subscribers. The video's focus is the 50/30/20 rule for managing money, which is a budgeting method. Marco provides a visual representation of the rule by comparing it to a pie chart, where 50% represents needs, 30% wants, and 20% savings or debt repayment. He emphasizes the importance of understanding where one's money goes after tax, known as net income, and gives examples of what could be considered needs, such as groceries, housing, insurance, and utilities.

05:01

🛍️ Distinguishing Between Wants and Needs

This paragraph delves into the differentiation between wants and needs. Marco explains that wants are items or activities that cause minor inconveniences if absent, contrasting them with needs, which are essential for survival. Examples of wants include shopping for non-essential items, dining out, and hobbies. He stresses that while hobbies contribute to life's joy, they are still categorized as wants because they are not vital for living. The paragraph aims to help viewers understand the distinction, which is crucial for effective budgeting and financial management.

💰 Allocating the Final 20% to Savings and Debt

In the final paragraph, Marco discusses the allocation of the remaining 20% of net income to savings and debt repayment. He suggests that an emergency fund, which covers 6 to 12 months of living expenses, is a critical component of savings. He also addresses the importance of aggressively paying off debts, such as credit cards and student loans, to improve financial health. Marco mentions his intention to create another video detailing strategies for debt repayment, including the debt avalanche and debt snowball methods. He concludes by emphasizing the significance of retirement savings, a common oversight that could lead to future financial struggles, and encourages viewers to share the video with others who might benefit from this financial advice.

Keywords

💡50/30/20 rule

The 50/30/20 rule is a budgeting guideline that suggests allocating 50% of one's after-tax income to needs, 30% to wants, and 20% to savings or debt repayment. It is central to the video's theme of personal finance management, providing a clear framework for viewers to understand and categorize their expenses. The script uses this rule to structure the discussion on how to effectively manage personal finances.

💡budgeting

Budgeting is the process of planning and controlling one's income and expenses. It is integral to the video's message as it helps individuals understand where their money is going. The script emphasizes the importance of budgeting by using the 50/30/20 rule as a tool to categorize financial needs, wants, and savings.

💡needs

In the context of the video, 'needs' refers to essential expenses that are crucial for survival, such as housing, groceries, and health insurance. The script defines needs as things that would greatly inconvenience one without them, illustrating this with examples like food and shelter, which are included in the 50% allocation of the budget.

💡wants

'Wants' in the video are non-essential expenses that cause minor inconveniences if absent, such as dining out or hobbies. The script contrasts wants with needs and suggests that they make up 30% of the budget, emphasizing the importance of distinguishing between the two to avoid overspending.

💡savings

Savings in the script refer to setting aside a portion of income for future needs or emergencies. It is part of the 20% allocation and includes emergency funds, which the script recommends to be 6 to 12 months of living expenses. The concept is crucial for financial security and is a key component of the 50/30/20 rule.

💡debt repayment

Debt repayment is the act of paying off outstanding debts, such as credit cards or student loans. The script includes it under the 20% savings category, highlighting its importance in financial health and suggesting that it should be prioritized alongside savings.

💡net income

Net income is the amount of money earned after taxes have been deducted. The script specifies that the 50/30/20 rule should be applied to after-tax dollars, emphasizing the importance of working with the actual disposable income one has, rather than the gross pay.

💡emergency fund

An emergency fund is a financial reserve set aside to cover unexpected expenses or income loss. The script describes it as a part of the savings category, recommending a fund size of 6 to 12 months of living expenses to provide a financial safety net.

💡retirement savings

Retirement savings are funds set aside to provide for one's future needs after retirement. The script mentions it as a component of the 20% savings allocation, underscoring the long-term financial planning aspect of the 50/30/20 rule.

💡personal finance

Personal finance encompasses the management of an individual's financial resources. The script focuses on personal finance as the overarching theme, discussing various aspects such as budgeting, savings, and debt repayment within the context of the 50/30/20 rule.

💡monthly budget

A monthly budget is a plan detailing expected income and expenses for a given month. The script encourages viewers to create a monthly budget to track their finances, which is essential for implementing the 50/30/20 rule and understanding one's spending habits.

Highlights

Introduction to the 50/30/20 rule for personal finance management.

Poll results show audience interest in personal finance, stock market, cars, real estate investing, and making money online.

The 50% of the 50/30/20 rule is allocated for essential needs such as housing, groceries, and insurance.

Defining 'needs' as things that would greatly inconvenience you without them.

The 30% for 'wants' includes non-essential items that improve life quality but are not vital.

Examples of 'wants' include shopping, dining out, and hobbies.

The importance of distinguishing between 'wants' and 'needs' for effective budgeting.

The final 20% of the rule is dedicated to savings and debt repayment.

Recommendation to save 6 to 12 months of living expenses for an emergency fund.

Advice on using the 20% for debt repayment strategies like the debt avalanche and snowball methods.

The significance of retirement savings as part of the 20% savings category.

Emphasis on the importance of creating a monthly budget based on net income.

The practicality of the 50/30/20 rule in understanding where every after-tax dollar goes.

Encouragement to share the video with friends and family who might benefit from the information.

The video's goal to provide valuable personal finance insights in a concise format.

Transcripts

welcome back to whiteboard finance my

name is marco and i'm here to help you

master your money and build your wealth

today we're talking about how to manage

your money using the 50 30 20 rule but

before we get into the video i just want

to show you very quickly a screenshot

here of a poll that i ran about two

weeks ago

so we have a lot of new subscribers to

this channel which is great and about

834 of you voted on this poll which is

awesome

so basically that poll is just asking

what kind of videos you want to see from

this channel and 30 percent of you said

personal finance related 22 percent said

stock market 18 percent said cars 17

percent want to learn more about real

estate investing and 13 percent said how

to make money online but the encouraging

thing is is that most of these comments

from this poll were people saying they

wanted to learn about all these things

so thank you so much to those who did

vote and contribute and that's why i

want to talk about personal finance in

this video today so you may be wondering

what the 50 30 20 rule is so as always

let's write this down so we can get a

visual representation of what this means

so pretend that we have a pie right here

and half of this pie which is the 50

percent actually stands for your needs

so again this is all about budgeting and

understanding where your money is going

and i in an ideal personal budget

portfolio so 50 are needs let's call

this

30 percent are going to wants

and then 20

is going to savings or paying off debt

so now that you have a visual

representation let's break down each one

of these numbers and give you examples

of each so that you can be gauging your

own personal finance based on these

metrics

keep in mind we're working with after

tax dollars which is called net income

so you may have a gross pay of let's say

50 grand a year but after taxes you're

only dealing with another specific

number we're using that after tax dollar

number

so in terms of the 50 percent

needs what are some things that can be

included in this so let's think about

regular living expenses so we have

groceries we have housing whether you

have a mortgage or rent uh you have

insurance for health uh heaven forbid

something happened to you i would

consider health insurance definitely a

need

you can have utilities so electricity

things like that etc etc so the the way

i define a need is that it's basically

something that would greatly

inconvenience you or something that you

literally cannot live without so food

shelter things like that

so when you budget 50 percent towards

your needs remember that those are what

you're looking at

so the next logical area to go into is

going to be

what is really considered a want

and i think this is where most americans

run into the difference between wants

and needs okay

so a want is something that causes a

minor inconvenience in your life okay

it's not necessarily a need to where hey

if i don't eat or if i don't have

shelter i may die right

a want is something where it's like hey

you know am i willing to give a minor

inconvenience like dropping netflix or

not having hulu or not buying a brand

new grill to grow a steak on you know

those are needs okay

so some of the things that would fall

under this category would be things like

shopping do you absolutely need to shop

for brand new clothes right this second

are you gonna drop dead if you don't get

a new pair of shoes

maybe my wife will but i know that i can

survive

um you know dining out i think this is a

big one for americans

a lot of people for whatever reason

their lifestyles are so busy that you

know it's easier just to jump in the car

and go grab something to eat rather than

preparing the food yourself

hobbies so i think that everyone should

definitely have a hobby that's one of

the greatest joys of life whether it's

gardening you know you fly drones you're

a video editor whatever you want to do

whatever keeps you happy as a hobby this

definitely falls under a want because

it's not necessary to live

so again guys a want is something that

you don't necessarily need but it

improves the quality of your life

greatly

so let's go to the last 20 and i know a

lot of this sounds basic but until you

actually write this down and understand

where all your money is going to it's

like your wants can easily creep into

that needs category to where they're

both overflowing and you're in debt

every month

so speaking of debt let's talk about

savings okay

so savings and paying off debt this is

where the last 20 of your income should

go to and again these are all net

numbers

so if you have let's call let's say for

example an emergency fund

okay

this i would consider savings what i

like to do for emergency funds this is 6

to 12 months

of living expenses so if you know that

your needs category and a little bit of

wants comes out to be let's say 2 000 a

month for your entire family you know

that you need to save about 12 to 24 000

in your emergency fund i know that

sounds like a lot of money but you know

one or two layoffs in a family of you

know one or two income earners that can

really save your butt right there you

guys

obviously you know paying off debts so

if you have credit cards you know

student loans

things like that these are debts that

you should just smash using that 20

and i will make another video about how

to actually pay off debt using the debt

avalanche and the debt snowball method

okay

and then obviously if you want to save

for retirement

in my opinion this is one of the things

that most americans will be suffering

from 20 30 years from now because a lot

of them are just not focusing on

retirement savings so i know a lot of

this stuff sounds like common sense you

guys but until you actually create a

monthly budget knowing what your monthly

net income is breaking it down by 50 30

and 20 percent you would be surprised at

where different dollars go for different

categories

so unless um unless it's not a want or a

need i would definitely put it under

this 20 savings in debt category so

that's pretty much all i have for you

guys today i know that this may not be

some earth shattering information

but again until you actually write it

down and understand where every single

one of your after tax dollars is going

you might be surprised so i know this

video is a little bit on the shorter

side but again it's very important

information so if you have a friend or

family member who would benefit from it

please share it with them i implore you

a lot of people are getting a lot of

benefit from these videos and i don't

ask for anything in return just that you

share it thank you so much everybody and

have a prosperous day

[Music]

you