Saturday, May 21, 2011

The 50-30-20 Budget

The beauty is in its simplicity: you divide your income into three easily-remembered chunks, and you can manage it easier. It goes like this: you allocate 50% of your income to your needs, 30% to your wants, and 20% to savings. Now, obviously things get a little tricky – “food” is a need, but “martinis and tapas on Friday night” aren’t. But, that aside, the real objective is obviously keeping your “obligatory” expenses (like your car payment and your mortgage) under 50% of your income, and tucking 20% away in savings.

Here’s a quick calculator for you to calculate yours:

And here's a good article on the concept:

Okay, so I'm always drawn to a good simple metric, and I love how straight-forward this pie chart is. Though it delighted me, however, it left me with a big question: what if we rotated the labels of the pie chart sections and their percentages?

What if we kept the 50-30-20, but rather than assigning “savings” the lowest piece of the pie (and, incidentally, lowest priority) we instead promoted it to the biggest piece and made it the top priority? What if we aimed to save 50%, making the pie look a little more like: 50% for savings, 30% needs, and 20% wants?

The answer? It would demand that we exercise even tighter management and discipline, but it would also promise a bit more reward for double the contribution to savings in the long run.

Is it possible? Absolutely it is.

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