August 2, 2022
Your personal finances don’t have to be complicated, especially budgeting. It should only take a few moments of your time per month. But unfortunately, most people spend hours and hours trying to come up with a solid monthly budgeting strategy.
That’s where the 50/30/20 rule comes into play.
It’s arguably the easiest monthly budgeting rule out there, and according to most finance experts, it works pretty well, too. It gives you a quick, easy-to-calculate estimate of how much to put towards your savings, expenses, and wants.
But how, exactly, does it work? Why should you use it? Let’s start from the beginning, shall we?
The 50/30/20 rule is a quick, easy-to-use budgeting tool that you can use to manage your monthly finances.
The rule of thumb is to use 50% of your income for the things you need, 30% of it for your wants, and put aside the remaining 20% in your Savings account. If you need to pay long-term debts, that’s done from the last 20%, too.
This rule helps you manage your income effectively, without wasting too much of your time with in-depth statements. Not only does it trim down the amount of time you have to spend on it, but it also takes away the stress of dealing with a dreadful amount of numbers.
Even if it sounds old, the 50/30/20 rule is quite new. It came into existence in 2005 from the infamous book “All Your Worth: The Ultimate Lifetime Money Plan” — written by US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.
Elizabeth wrote this book after completing 20+ years of her research when she concluded that managing your finances shouldn’t be a tough job.
The 50/30/20 rule could be useful for a number of people groups, but you would benefit the most from it if you’re from one of the below-mentioned categories.
If you’re new to personal financing and budgeting, the 50/30/20 rule comes in handy. You don’t have to spend too many of your brain cells on it, plus it’s easy to keep track of it throughout the month.
However, that doesn’t mean the rule isn’t good enough for experienced individuals. It’s good enough for everyone to put their monthly income into effective categories.
If you’re happy with everything you currently have, you probably don’t need the 50/30/20 rule. But — if you’re someone trying to achieve something expensive, say start a business, buy a house, move somewhere to get a better life, etc, you would need to save.
If that sounds like you, the 50/30/20 could be your savior.
If you’re aiming for a better credit score or want to take off a certain debt from your ledger faster, the 50/30/20 might be your best friend.
It’s so easy to follow that you won’t have to disturb your daily routine or hire an expensive financial consultant to use it. Plus, it puts enough savings in your hand per month that you’d be able to comfortably pay off your debts.
As COVID-19 has taught us, you can never be too careful about pandemics and recessions at your doorstep. It just makes sense to save a bit of money for a rainy day, say when a recession hits, or your insurance company doesn’t save you from a calamity.
If you’re into saving for tough times (and you should be!), or you’re considering doing it, the 50/30/20 could be a solid ground to start.
First of all, note down your after-tax monthly income from all the sources, then categorize it as follows.
Your needs are the things you can’t live without — that’s why most of your income goes here.
These include your housing rent or mortgage, groceries, utility bills, health care, transport, and minimum loan payments.
Experts say 30% of this category must be used for housing and the rest for everything else.
Your wants are things you don’t exactly need to live, but they still make your life better.
These include your Friday movie nights, dining out, non-essential clothing, vacations, gym memberships, subscriptions like Netflix & Spotify, and other similar things.
Don’t try to trim this category down to save money. Remember, you need to keep treating yourself with goodies to keep your brain and body healthy.
Last but not least, the remaining 20% goes directly to your Savings account.
According to experts, you should have enough money in your savings that could sustain you for 3 to 6 months in case of a rainy day. Say you lose your job as a full-time employee, or you lose a freelance client you’ve been depending too much on, you’d be thankful to yourself for saving this lot.
If you’re saving for retirement, consider getting a tax-advantaged account, like the IRA, and put your 20% there.
Simply put, the 50/30/20 rule is a solid, but incredibly easy-to-follow budgeting tool for many people groups. It may not be for everyone, but it works well for most individuals looking to sort out their finances on a high level.
This article was written by
Marcia Wendorf is a former high school math teacher, technical writer, author, and programmer. She stays on top of worldwide news about science, government policies, finance, infrastructure, and medical issues. When not writing or advising clients, Wendorf spends time with her family and enjoys baking.