Budgets should be about more than just paying your bills on time—the right budget can help you determine how much you should be spending, and on what. The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic financial goals, and foster overall financial health.
If you’re trying to become a better money manager, it’s really helpful to have a clear strategy that ensures you are putting enough of your money in all the right places. The 50/30/20 rule is a budgeting framework that outlines what percentage of your income to allocate for the three of the most important parts of your budget.
The premise is simple - you allocate 50% of your budget for your essentials, 30% for wants, and 20% for debt and savings.
What is the 50/30/20 Budgeting Rule?
The 50/30/20 rule starts by calculating your income after all deductions, and allocating your budget as follows:
50% of your income goes towards your needs or financial obligations
30% for your wants or non-essential items
20% for debt and savings
Following the 50-30-20 rule would allow you to get the most out of your disposable income. It allows you to splurge and save at the same time.
How Does the 50/20/30 Budget Rule Work?
50% Towards Your Needs
What are your needs? Typically this includes food, rent, a car loan, student loans, insurance of any kind (auto, health, life, etc.), and monthly costs for utilities and essentials. You might not have all of these expenses, and you might have others to add to the list. But, in general, half of your take-home pay should go towards the necessary bills that pay for your food, shelter, and transportation.
30% Towards Your Wants
The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. It all depends on what you want out of life and what you’re willing to sacrifice. These personal lifestyle expenses include items such as: your online subscriptions, restaurant bills and trips to the coffee shops and pubs.
Other components of this category include gym memberships, weekend trips, and dining out with your friends. Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory.
Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you make with clearing debts and being successful in the last part of this budgeting rule.
20% Towards Debt and Savings
The next step is to dedicate 20% of your take-home pay toward savings. This includes savings plans, retirement accounts, debt payments and emergency funds. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending. You’ll pay off debt quicker and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.
This exercise will provide you with a clear vision for your spending so you can have a better idea of what improvements need to take place. While it may seem like a hassle at first, eventually, as you adjust your spending and saving habits, you’ll realise how helpful the rule is for not only your future, but also your peace of mind.
