Needs are bills that you are contractually obligated to pay or that are necessary for basic human survival. These living expenses include rent or mortgage payments, health care, groceries, and utilities.
Savings refer to allocations toward a bank savings account, retirement funds, and any investment payments. This means that 20-percent of your income should go into creating an emergency fund, making IRA contributions, and investing in the stock market.
Step One:The first rule of thumb is that half of your after-tax income (50-percent) should cover your non-negotiable needs. This half of your after-tax income is also known as disposable income.Step Two:Now that you have paid your bills and minimum debt repayments, you can designate 30-percent of your remaining after-tax income to “wants.”Your wants should take up no more than 30-percent of your after-tax income.
Step Three:The final step is to devote 20-percent of your income to savings and additional debt repayment. Savings refer to your emergency refund, retirement account, and extra payments on any outstanding debt.