If you find managing money tedious or you struggle to manage your finances, the 50/30/20 budget rule approach might be just what you need. Using this strategy, you can ensure that your funds are secure for the future while allowing you to live a comfortable life. In addition, this approach is not as tricky or strict as other budgeting rules since it only requires you to split your expenses into three categories; needs, wants, savings, or debt.
Who created the 50/30/20 rule?
Senator Elizabeth Warren popularized the 50/30/20 rule in All Your Worth: The Ultimate Lifetime Money Plan. Senator Warren designed this book as a rule of thumb to help working-class families plan their spending and prepare for the future. She noticed that most families weren’t planning financially due to their income not being enough to cover expenses during retirement. She realized that if families calculate it out, applying the 50/20/30 budgeting rule every month can give them at least two decades’ worth of money set aside! Similar to regular savings, the earlier you start, the more money you have in the end.
How does It work?
The 50/30/20 budget rule is a straightforward strategy that takes the complication out of saving or managing your money. The best ways to budget are often the simpler ones. This strategy is easy to follow and applies equally well to most financial situations. Whether you are just starting, need more discipline in your finances, get back on track after a financial setback, or make sure there isn’t too much stress involved when dealing with unexpected expenses.
Since this budget rule only requires you to track and divide your expenses into three categories, It reduces the time you spend budgeting every month. In addition, it tells you exactly what percentage of your funds to put towards your needs, wants, and financial goals.
Needs (50%)
This category includes your necessary monthly expenses, such as a mortgage, rent, groceries, car insurance, health care expenses, utilities, a well as your credit card bills.
There is no need to specify exact percentages as long as you make sure to stick close to the suggested 50%. It’s better to track your expenses, so you know where your money is going. If your necessary expenses take up more than half of your income, try cutting down the costs or bite the bullet and take some cash from your wants fund.
The “needs” category doesn’t include your shopping habits, your subscriptions, or dining out. However, these things will fall in your want categories, as mentioned in the next section.
Wants (30%)
Wants are all things that are not essential, things that you choose to spend your money on, which includes entertainment and any other leisure expenses. Some examples are going out to eat, vacations, unnecessary monthly subscriptions and memberships, and shopping. Everything from the “wants” category is optional; these are all expenses you can live without.
This category also includes non-essential upgrades, such as buying an expensive car when your previous car had no mechanical issues or getting the latest smartphone every year. In short: wants are all those extra bucks we spend on things that make us happy because they are not necessities!
Savings or debt (20%)
The remaining 20% of your income can go towards your saving, your debt, or investments. It is recommended to have at least six months of emergency savings. Although it can be difficult for many people to have six months of emergency funds saved, you must have enough money saved for rainy days or unexpected financial setbacks.
Having money saved can give you some peace of mind when you decide to tackle your debt. However, if you are in debt, avoid putting off your payments. Otherwise, you can get stuck in an endless cycle of owing, and your interest rate will keep pilling up.
Example of the 50/30/20 Plan in Action
Let’s say John makes $5,000 a month. Using the 50/30/20 plan, He splits $2,500, which helps with his rent, food, and bills. This leaves him with $1,500 for flexible spending and $1,000 to go into his savings and put some money towards his debt. If John sets a goal to pay off his debt, he would have to subtract from his flexible spending to contribute more money towards his financial goals.
50/30/20 Rule vs. Other Budgeting Methods
The 50/30/20 rule isn’t the only budgeting technique. There are a few other budgeting approaches that might better suit you:
- 80/20 Rule: In this method, you set aside 20% of your paycheck into savings. The rest of the money can be spent on necessities, leisure activities, or entertainment. With this rule, you don’t have to keep track of your spending. This technique is more lenient, but it doesn’t divide your income into categories.
- 70/20/10 Rule: You may have noticed that this rule is similar to the 50/30/20 rule. It is because the 70/20/10 rule is a modified version of the 50/30/20 budget rule. This saving rule divides your budget into the following categories: 70% to living expenses, 20% to debt payments, and 10% to savings.
Is the 50/30/20 rule Right for you?
Overall, the 50/30/20 rule is a great way to manage your funds. However, choosing whether this approach is right for you depends on your circumstance. For example, a potential issue with the 50/30/20 budget is that, depending on your income, 50% may not be a large enough percentage to cover your needs. In addition, this budget doesn’t work well for higher-income earners as it calls for spending too much on wants than needs or savings.
Make Your Own 50/30/20 Rule
If you feel like one of the categories doesn’t accurately represent your spending habits, feel free to tweak them according to your needs. For example, 60% of your funds can go towards your needs, 20% into your savings, and another 20% towards your leisure spendings.
Your percentages may need to be adjusted based on your circumstances and goals. As stated before, the 50/30/20 budget rule can be a great way to manage your money. However, the most important thing to do is to find a system that works for you. Give this budgeting strategy a try, manage your expenses and take a step towards a better financial future.
