If you are getting lost on how to manage your monthly salary in order to spend well and also get good savings, the 50/30/20 budget rule can really help. The 50-20-30 (or 50-30-20) budget rule is an intuitive and simple plan to help people reach your financial goals well and stably. So let’s discover what is 50/30/20 budget rule and how it can foster you to get your goal in financial freedom.
What is the 50/30/20 budget rule?
The 50/30/20 budgeting rule–also referred to as the 50/20/30 budgeting rule–divides after-tax income into three different buckets:
- Needs (50%)
- Wants (30%)
- Savings (20%)
The 50/30/20 rule was popularized by Sen. Elizabeth Warren (a Harvard law professor and her daughter, Amelia Warren Tyagi. This rule was mentioned in the book All Your Worth: The Ultimate Lifetime Money Plan. It was designed as a great methodology for all types of families to plan their spending in order to be ready for an unforeseen future and any unexpected circumstances.
Let’s jump into each rule right now!
Needs (50%)
Needs are those amounts that you absolutely must pay and are the things necessary for our survival. They include:
- Rent or mortgage
- Car, groceries
- Utilities, such as electricity, water, and sewer
- Health care, insurance
- Schooling fee, dept (if any)
Wants (30%)
Wants are what you desire to have but don’t actually need to survive. They might include:
- Hobbies
- Vacations
- Dining out: fast food or luxury restaurants, Starbuck,…
- Entertainment: movie, karaoke, tickets to sport events
- Impulse items
- Digital and streaming services like Netflix and Hulu
Savings (20%)
Finally, try to allocate 20% of your net income to savings and investments. They might include:
- All savings: retirement contributions, saving for a house, rainy-day funds,…
- Investment: learning for yourself or your children, business,…
How does the 50/30/20 budget rule work?
Many people often wonder why they can earn quite good money but they cannot save much. The 50/30/20 budget rule is a great way to help you raise awareness of your financial habits, limit overspending and under-saving. By trying to spend less on the things that don’t matter that much to you, you can save more for the things that do.
Let’s figure out on how it works:
- Calculate your monthly income: Total all how much you receive in your bank account each month. Remember to add in the withheld from your workplace retirement plan or deduct the estimated taxes, then it results in your real final income amount.
- Calculate a spending limit amount for each category: Multiply your real final income amount by 0.50 (for needs), 0.30 (for wants), and 0.20 (for savings) to see how much you should ideally spend in each category. Then you get the specific final amounts.
- Plan your budget around these numbers: Think of these three categories as limits that you can fill with monthly expenses. List and check if your monthly expenses are being under or over the category each falls into. After all things are clear, you will have useful information to proceed with next steps.
- Follow your right budget direction: After having a budget planned, keep following it and tracking your expenses each month, and make adjustments where needed, in order to stick to your spending goal.