How To Manage Your Money (50/30/20 Rule)
Summary
TLDRIn 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
📋 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.
🛍️ 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.
Mindmap
Keywords
💡50/30/20 rule
💡budgeting
💡needs
💡wants
💡savings
💡debt repayment
💡net income
💡emergency fund
💡retirement savings
💡personal finance
💡monthly budget
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]
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