How to balance salary between savings and expense?

The rule is to split your after-tax income into three categories of spending

Do you know Elizabeth Warren popularized the 50/20/30 budget rule in her book, All Your Worth: The Ultimate Lifetime Money Plan? Thus the rule is to split your after-tax income into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.

Talking about the same, this intuitive and straightforward rule can help you draw up a practical budget that can be stuck to over time to meet financial goals.

The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do.
The remaining half should be split up between 20% to savings and debt repayment and 30% to everything else that you might want.

Well, the rule is like a template that is aimed to help individuals manage their money and save for emergencies and retirement.

50%: Needs

Meanwhile, Needs are those bills that one must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities. These are your “must-haves.” The “needs” category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.

Furthermore, Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or a more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.

30%: Wants

Wants are all the things you spend money on that are not essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the “wants” bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out or watch sports on TV instead of getting tickets to the game.

This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda, or choosing between watching television using an antenna for free or spending money to watch cable TV. Wants are all those little extras you spend money on that make life more enjoyable and entertaining.

20%: Savings

Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.

If emergency funds are ever used, the first allocation of additional income should be to replenish the emergency fund account.
Savings can also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce the principal and future interest owed, so they are savings.