The 50/30/20 finance ratio – or a way to budget – is something we talked about last year, where you dedicate 50% of your income to needs, 30% to wants and the remaining 20% goes towards your savings and investments.
This breakdown is simple, effective, and ensures that your essentials, lifestyle choices, and future financial goals are all covered. Of course, some may adjust the percentages to suit their circumstances—for example, allocating 25% or more to savings—but the key is to include all three categories and keep your budget balanced.
Needs
This category includes essentials such as housing, utilities, groceries, insurance, and transportation. These are non-negotiable expenses—needs that must be covered to live safely and comfortably. While the cost of housing or groceries may vary from one person to another, the necessity of these items remains the same. Whether you shop at a high-end grocery store or a discount market, food is a basic need. Hence, it’s essential to include these items in your “needs” category.
Wants
Unlike needs, wants are flexible and discretionary. They enhance the quality of your life but are not essential for survival. Travel is a common example—it can boost your mental well-being and offer life-changing experiences, but it’s not a necessity. The same goes for shopping and entertainment. These vary widely based on income, lifestyle, and financial goals. For some, dining out weekly is a treat; for others, it might be a monthly splurge. The point is to recognize that “wants” are optional and should be managed wisely.
Savings and Investments
Lastly, the remaining 20% should go toward saving, investing, and debt repayment. Though it’s the smallest portion numerically, it’s one of the most crucial. If you can consistently save and invest 20% of your income, you’re ahead of the curve—many struggle to manage even 5-10%. Achieving this might not be easy at first, especially if your needs and wants consume most of your income. However, with good planning and discipline, this portion becomes manageable. Think of it like building a strong foundation: once your needs and wants are under control, saving becomes a natural next step.
Final Thoughts
If budgeting feels overwhelming, start with the 50/30/20 rule as your foundation. Once you’re comfortable, you can fine-tune your plan to suit your goals. The key is to prioritize needs first, enjoy your wants mindfully, and always make room for saving and investing in your future.