50/30/20 Rule: Also good for windfalls!

I have touched on the 50/30/20 rule in the past. The basic idea is that you use 50% of your income for your needs (housing, food, transportation, etc). Next you use 30% for wants (cable TV, gym membership, Playstaion 3, etc.). Finally you allocate 20% to savings (retirement, emergency fund, house down payment, etc.).

This same principal can be used for a windfall of money small or large. This includes: bonuses, inheritance, gifts, side work income, etc. Using a windfall for just one category can leave you feeling short in other areas. The numbers are not set in stone but a great starting point. Here is an example of how you can allocate a $1000 bonus:

  • 50% - Need - $500 payment toward debt (credit card, mortgage, etc).
  • 30% - Want - $300 - buy that Playstation 3 or Xbox 360 you always wanted.
  • 20% - Savings - $200 - Add to emergency fund or retirement account.
I find that by breaking up your windfall into these areas you get ahead on all fronts. In the long term this will get you closer to a multitude of goals and you won't feel the "guilt" of not making any progress. Life is all about balance and why not balance your windfall?

With a little planning we can take advantage of windfalls to the fullest and get one more step closer to financial freedom. By breaking it up into the 3 broad categories you will not have remorse later and and think to yourself: "Gee I wish I had used some of that bonus to pay the credit card" when something bad happens. Balance is the secret to happiness!