Budgeting and the 50:30:20 rule | Budgeting | Financial Literacy | Khan Academy

Hi everyone, Sal here, and I want to 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. The reason why you want to do it is you, at the most basic level, want to make sure you're not spending more than you're bringing in. But even more, you want to make sure that you're spending it on the things that matter more for you, especially in the long term.

When you set up a budget—and we'll have other videos where we show examples of this—you’re going to want to think about the money that you're coming in. This is oftentimes going to be from your paycheck. Maybe you have other sources of money coming in. You want to think about that money after tax, which can be sometimes significant. Then from that, you want to think about, well, where’s the money going to?

Now, a lot of folks will talk to you about the 50-30-20 Rule. It doesn't have to be exactly 50-30-20, but it's a nice framework to think about. Fifty percent of the money that you bring in, maybe you could spend that on your needs; thirty percent, you can spend on your wants; and twenty percent, 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. For example, your rent—that would be a need. Now, you could debate how much of an 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 out to eat at a restaurant. That would be a want. 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 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.

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, or maybe you have to transition your work, that you have something to live off of.

You also want to 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 want to 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 saving side of that, the better. It doesn't have to be only 20, but that gives you a nice framework. So for every thousand dollars maybe you bring in after taxes, five hundred of that for needs, three hundred dollars of that for wants, two hundred dollars of that for savings.