Do you have a budget? Do you know the 50/30/20 budgeting rule? This post is my take on the 50/30/20 rule and how it can be supercharged for retirement.
The 50/30/20 Rule OG
The 50/30/20 rule says to spend 50% of your income on needs, 30% on wants, and 20% on savings. The challenge is that many spend way more on needs and wants and less on savings. As you approach retirement, this gets even more complicated. But there’s a fix. Change the order. Make it the 20/50/30 rule. And supercharge it as your income grows.
Pay yourself 20% FIRST!
The first step is to pay yourself first. When I began in this industry, my dad taught me to start every financial plan with “Pay Yourself First.” He said, “If you don’t pay yourself first, nobody else will.” Warren Buffet agrees when he says, “Do not save what is left after spending, but spend what is left after saving.” See 6 Best Pieces of Money Advice for the Middle Class. So I tell my clients to save in their 401k or 403b and in outside taxable accounts. The outside taxable investment accounts can be used for buying cars and other big purchases.
Lower your Needs below 50%
If you are careless, home and auto expenses will make up most of your needs or fixed expenses. Nerdwallet says 30% of your income should go towards housing/rent. Investopedia says 10 to 20% goes towards auto expenses. One way to get ahead as your approach retirement is to pay cash for cars and pay off your home fast. This virtually eliminates most of the 50% needs portion of the budget. Here are two of my favorite blog posts on how I lower home and car expenses – Mortgage Habits of Millionaires and Avoiding Black Hole Car Habits.
Supercharge Your Savings
As your income grows, max out your 401k or 403b. Add to Roths if you qualify. And grow your after-tax taxable investment account. For most, this is titled jointly or as a Trust. Either way, you can save after-tax money here that grows tax efficient, if invested in the right funds. You can use this account for income if you retire before 59 1/2. And you can do some pretty cool tax planning techniques to qualify for cheap healthcare before Medicare.
Discover New Wants
This is when you can really start to enjoy life. By lowering your needs and increasing your savings, you’ll have even more money to live your best life. If you audit your cash flow, you can make sure you are spending on things that bring you the most joy. For me that is family, vacations, and golf.
Takeaway
The 50/30/20 is a good starting point if you are having trouble with cash flow. It gives you a foundation for making decisions with your money. Smart financial decisions can shift the 50/30/20 rule and supercharge your savings for retirement. That is when the real fun starts.
