One of the key aspects of managing your personal finances is budgeting. You will be able to effectively and in a sustainable way manage your income. To do this, you need to follow some guidelines like the 50/30/20 rule in finance. You might be wondering, what is the 50 30 20 budget rule?
When you make money, you should have a plan on how you are going to spend that cash. It involves allocating the income into different areas that are import to your life.
Budgeting is creating a plan to spend your money. The idea is to ensure that you spend less than you are earning as you plan your financial goals.
In this regard, budgeting is the process of creating a spending plan. You also find ways to save and invest your hard earned income.
The objective of budgeting is to help you reach your personal financial goals.
To do that, you need to use budgeting rules or guidelines in allocating money into your most important things like your needs, wants and savings.
The 50/30/20 budget rule is a simple practice where you break your monthly net income into these three categories;
- Basic Needs – 50%
- Wants – 30%
- Savings – 20%
Using this budgeting rule, you are able to spend your income without going beyond your means.
It is possible to have financial discipline in managing your personal finances by following the 50-30-20 budget rule or approach.
It can be a challenge to manage your finances and setting your monthly budget. However, you can sue the 50-30-20 budgeting strategy to simplify your process.
What is the 50 30 20 Budget Rule?
The 50-30-20 budget rule is an approach that you can use to budget your finances.
As a budgeting or finance rule, the 50-30-20 helps you to allocate your money into three main areas; needs, wants and savings.
This budgeting rule allocates 50% to needs, 30% to wants and 20% to savings.
It is a set of guidelines popularized by Sen. Elizabeth Warren and her daughter Amelia Warren Tyagi in the book All Your Worth: The Ultimate Lifetime Money Plan. You can get this book on Amazon
It was designed as a rough rule of thumb for working-class families to plan their spending in order to prepare for the future and unforeseen circumstances.
Three Categories Included in a 50 30 20 Budget
In very simple terms, the 50/30/20 budgeting rule involves allocating your after-tax income into three categories.
The three categories included are;
- Basic needs.
- Savings and debt.
Your 50% of your income goes towards basic needs. These include your shelter, food, utilities and clothing. These are the thing you need to actually live as a human being.
Another 30% of your income goes to your wants. These are things you desire to have, but are not really basic requirements.
They include lifestyle-based choices like hobbies, vacations, eating out, subscriptions and mobile phone plans among others.
The next 20% of your budget goes to long-term savings and extra payments on any debt you may have.
For example, this bucket would include contributions to your 401(k) or IRA. And if you’re trying to become debt-free, the extra debt payments would go into that budget.
Basically, the 20% bucket is for your financial priorities including your savings for the future and some debt repayment.
How the 50/30/20 Budgeting Rule Works –
As I have mentioned, the 50-30-20 budgeting rule involves three categories. These include;
- Needs – 50%
- Wants – 30%
- Savings – 20%
The idea here is allocating your after-tax income to the three categories.
50% on Needs
This category covers what you cannot live without. It is important to ensure you allocate money to your basic needs.
They include things like;
- Basic utilities like water or electricity.
Make sure you budget for the basic needs. Your situation will determine how this 50% of your income will be spent.
30% on Wants
As a human being, you have things you desire but don’t need to survive. This is what this category is about.
You should budget or allocate money to spend on the things you want. These include;
- Dining out.
- Entertainment services.
This list is not exhaustive, but provides you with an idea of what you would spend money on when it comes to wants.
20% on Savings & Debt
As part of your budgeting system, you should allocate 20% of your net income on savings and debt payments.
This means you should set aside money to all your savings such as 401k savings, emergency fund, getting a mortgage and debt repayments.
Here are the 7 Benefits of Investing in a 401k Saving Plan
It is important to remember that 50/30/20 is tool to help you plan your budget.
You should look for ways to supplement this budgeting approach with a way to monitor your spending.
This means you should track your budget using the various budget apps available such as YNAB, Mint or Quicken among others.
Related: 12 Best Personal Budgeting Apps
Why You Should Follow the 50 30 20 Rule in Finance
The reason you are thinking about the 50/30/20 budgeting rule is because you want to improve your financial situation.
You should follow the 50-30-20 rule in finance to be able to manage your after-tax income prudently.
The reasons are to help you have enough money. You can use this approach to cater for your basic needs, wants and have money to save.
When you start using the 50/30/20 budgeting rule you are going to have a better idea of where and how you are spending your money.
This approach will help you to live within your means. You will also be able to increase your savings.
Related: 11 Ideas on How to Create Personal Financial Plan
With good personal finance management, you’ll also learn to control your money so you can achieve your financial goals.
Is the 50/30/20 rule budget good for you?
Budgeting is important to your personal finances. Having a way or an approach to guide your budgeting is critical to the success of reaching your financial goals.
You might be wondering; is the 50/30/20 rule budget good for me?
While the 50-30-20 budgeting rule is good and sound as an approach, it’s success depends on your specific circumstances.
You should consider your three categories, and how you are going to track how you spend on each of the category.
If you do not create a structure, budgeting could be harder. You might find it very difficult to improve your spending habits.
Budgeting Approach or System
You should consider a budgeting approach or system that fits into your personality. As an approach, the 50/30/20 budget rule provides you with a less detailed way to manage how you are going to spend your money.
Another potential issue with the 50/30/20 rule budget is the breakdown of money allocated to needs, wants, and savings or debt.
Depending on your income and where you live, 50% may not be a large enough percentage to cover your needs.
For instance, if you live in an area with a high cost of living you might have to put a large part of your income toward housing, making it almost impossible for you to keep your needs under 50% of after-tax pay.
Some critics of the 50-30-20 rule in budgeting argue that it does not work for higher-income earners.
This is because the approach means you are spending too much on wants, when compared to needs, savings or investing.
In conclusion, the 50/30/20 rule in budgeting is a great approach in managing your personal finances.
You are going to get a lot of help from using a simple budgeting approach.
By just focusing on three categories, you eliminate a lot of details that would make budgeting boring to you.
The three categories include your needs, wants and saving or debt payments.
It is also important to note that your individual circumstances dictate your budget. However, you can adjust the 50-30-20 rule in finance and budgeting to fit your situation.
The idea here is for you to create a realistic budget. It is the reason I would advise to use this budget rule to spend your money wisely.
Overall, the 50/30/20 budgeting rule can be an awesome way of managing your money. It is an approach that can work for you, even when you have little money or broke.
Related: 11 Unique Ways to Create a Budget When Broke
You will have the freedom and the flexibility to allocate your money into the issues in your life.
It is your responsibility to determine whether you want a detailed or a less detailed budgeting system.
However, having a budget is an important part of ensuring you manage your personal finances better or wisely.
So, what is the 50 30 20 budget rule? As I have shared with you here, the 50-30-20 budgeting rule provides a framework for you to work within. Your life is different from anyone else’s.
Understanding your income and expenses is the first step towards using this 50/30/20 finance rule to make most out of your money.