How 50-30-20 Rule Helps Saving for Down Payment

Tuesday Jul 21st, 2020


Savings for a reasonable down payment is essentiall to purchase a house. It can amount to a large chunk of cash (with a minimum 5 percent of the total payment for a down payment). Without a substantial budget and savings plan, it can be challenging to get this cash together.

The 50-30-20 budget concept was first introduced in 2005 by Elizabeth Warren and her daughter Amelia Warren Tyagi in their book, 'All Your Worth: The Ultimate Lifetime Money Plan.' Under this program, savers use a system of percentages to prepare their monthly budget, allowing consistent savings each month. They will use the same application to help them save on down payment. In this article, we will be discussing how you can save money for the down payment using this budget rule.

The 50-30-20 Budget Rule

The first idea is to sum up monthly after-tax revenues. This can easily be achieved by those in stable jobs, reviewing their payslips, and adding back pension and medical insurance benefits if necessary. Simply take the gross income minus company expenditures and taxes for the self-employed.

With your monthly income worked out, split it into three categories: needs of 50 percent, wants of 30 percent and investments, and debt payments of 20 percent. This will give you the amount of money you will spend in every category every month. For instance, if you receive $4,000 a month, you'll have $2,000 to spend on needs, $1,200 to spend on wills, and $800 to spend on savings.

The hard part is how to figure out which expenditures come into which category. This is different depending on the circumstances; for instance, if there is no public transport, some people need a car to get to work, while some can do without one.

50% Needs

In the group of needs, you can find all the costs and bills that have to be charged so that you can survive and not incur penalties. Rent or mortgage payments usually make up the more significantamount here, along with other expenditures, including utilities, food (the essential, transportation, and likely car and insurance payments. It will also contain any minimum loan repayments.

Some benefits that will cause you trouble if you skip them-such as child support-are also included in this group. Trying to save for a down payment by cutting expenses from this group may prove to be difficult, but if you're willing to find your dream home, finding a cheaper rent, for instance, may go a long way.

30% Wants

As mentioned above, your wishes are those things you might do without on a push or at least downgrade. In general, the expenses in this category are the enjoyable items that spice up your life, such as holidays, gym membership, dining out, shopping for clothes and shoes (unless urgently needed!), and TV packages.

If you find it hard to cram all your wishes into 30% of your budget, you can consider living a little less extravagantly. It's not a lot of fun to live frugally, but cutting back on your lifestyle costs will really pay off in the long run. It sounds challenging to give up movie nights or brunch with friends, but try to visualize your future home, and never lose sight of your long-term target.  This category is the best one when it comes to saving for a down payment.

20% Savings and Debt Payments

You can then bring the remaining chunk of your monthly income into savings accounts or go further towards paying off your debt. Although minimum debt payments are a must, in this category, anything that you pay back beyond the minimum will be counted. Your savings plans can include a retirement plan, emergency funds, or particular investments, such as a down payment.

Save for a Down Payment with 50-30-20 Budget Rule

It's well worth noting that this budget law isn't set in stone, and you shouldn't panic if the numbers aren't correctly adding up. This is something of a guideline and should be viewed as such so that you can adapt it to fit your needs best.

You can opt to cut back on your lifestyle and make choices while saving for a down payment and devote just 20 percent to them. In this way, every month, you will save 30 percent of your salary, enabling you to add more to your monthly down payment.

Applying this budget plan will help you cut down unnecessary spending habits. Not only that, but it will also help you realize where your paycheck is going every month. It's also a good indicator of whether you're currently spending beyond your means and whether now is the right time to start thinking about buying a new home. Don't feel tied to it, and feel free to tweak it to help you realize your needs and goals.

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