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Budgeting and the 50:30:20 rule

The 50-30-20 rule is a suggested budgeting guideline that advises allocating 50% of your income to necessities (like rent, groceries, and utilities), 30% to discretionary spending (like hobbies, entertainment, and travel), and 20% to savings. The goal is to create a balanced budget that allows you to cover your needs, enjoy life, and save for the future. Created by Sal Khan.

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Video transcript

- Hi everyone, Sal here and I wanna talk a little bit about budgeting. So at a very high level, a budget is a way of keeping track of how much money you're bringing in and how much you are spending. And the reason why you want to do it is you at the most basic level wanna make sure you're not spending more than you're bringing in, but even more you wanna make sure that you're spending it on the things that matter more for you, especially in the long term. So when you set up a budget and we'll have other videos where we show examples of this, you're gonna wanna think about the money that you're coming in. So this is often time going to be from your paycheck. Maybe you have other sources of money coming in. You wanna think about that money after tax which can be sometimes significant. And then from that, you wanna think about, well, where's the money going to. Now a lot of folks will talk to you about the 50, 30, 20 rule. And this is, it doesn't have to be exactly 50, 30, 20 but it's a nice framework to think about which is 50% of the money that you bring in, maybe you could spend that on your needs. 30% you can spend on your wants and 20% use that for savings. Now, what are needs and wants and actually what qualifies as savings? Well needs are things that you pretty much need. You need a place to live. You probably need some transportation. You need to eat. So for example, your rent, that would be a need. Now, you could debate how much of a apartment you might need, but whatever you're paying for rent is probably a need. Your groceries are a need. If you have to pay, for example, insurance or lease or you're paying a note on a car, those are all needs. Now, what are wants? Well these are things that you might like, but you don't need them necessarily to survive. For example, you need to do groceries to eat but you don't need to go to out to eat at a restaurant. That would be a want. And as we know, it's a lot more expensive to go to a restaurant than to get groceries at the supermarket and cook for yourself. Another want might be you're going to a concert or you're going to a movie or maybe going on vacation or something like that, that would classify as a want. And then savings, the number one reason why you want it is you want to put some money aside for a rainy day. You want an emergency fund where if for whatever happens you had some medical expenses that you didn't expect happening, or maybe you have to help out a family member, maybe you have to transition your work that you have something to live off of. You also wanna put some money aside if you're saving for a down payment on a house or you're saving for some other big purchase or you just wanna save for retirement, it's important to put that money aside. So think about this 50, 30, 20 rule. Honestly, the more that you can put on the savings side of that, the better. It doesn't have to be only 20% but that gives you a nice framework. So for every $1,000 maybe you bring in after taxes, $500 of that for needs, $300 of that for wants, $200 of that for savings.