Personal finance

The 50/30/20 Rule: How  It Works

The 50/30/20 rule is a popular budgeting method that splits your monthly income between three main categories: needs, wants, and savings. The formula has become very popular in large part because it’s easy to get started, and easier to follow than many other budgeting strategies.

In this article, we’ll explain how the 50/30/20 rule works, and how you can effortlessly apply it on your own finances.

The 50: Needs and obligations

The 50% of your income is used to pay for necessities and obligations. The main rule is to think in terms of “needs” versus “wants”. If you must have the item, it’s a need, otherwise, it’s a want.

Needs include rent or mortgage payments, car loans, student loan payments, gas and electric bill payments, insurance payments, food costs, medical costs and other minor necessary expenses.

Note that while all obligatory expenditures (such as paying the minimum on your mortgage) should be put in this category, voluntary expenditure should not. If you opt to pay more than you absolutely need on a mortgage or other debt repayment, that expense should go into the savings and debt category.

The 30: Everything else (a.k.a. wants)

The remaining 30% of your income is yours to spend on anything you like. This includes entertainment, hobbies and interests that don’t have an obvious cost associated with them (for example visiting family or travelling).

It could also include paying for some of your “wants” such as wine club memberships or clothes shopping if they aren’t already covered by your “needs”.

The 20: Savings and debt

According to the rule 20% of your income should be used to save and to repay debt. If you are not able to save that much or even pay down debt, the rule simply suggests that you should be working towards saving 20% as quickly as possible.

For those with no debt and a surplus of funds each month, this is an opportunity to add to your savings without paying down other debts. This portion may be used for retirement saving, extra payments on your mortgage, setting aside cash for a car or other large purchase, or to invest in the stock market.

The more you can put away every month the better, but at least 20% is a good start.

Evaluating the 50/30/20 rule for yourself

People who are struggling to get by are often advised to keep a budget. But if you’re living paycheck-to-paycheck, or even just barely getting by on whatever income you have, it can seem impossible to know where your money is going.

The rule offers an easy to follow alternative to traditional budgeting that actually works for most people. With the 50/30/20 rule, you don’t have to track every penny – just make sure that you hit your spending targets for each of the categories (50% needs; 30% wants; and 20% savings) every month.

Using a budgeting app or spreadsheet might seem easier than the 50-30-20 method, but it doesn’t always work for people whose incomes are variable from month to month. There are also other methods available such as envelope and zero based budgeting, which can be great if they work well with your financial circumstances. In many cases though, these more detailed courses require too much time and effort to get right. The 50/30/20 rule is easier to follow and is just as effective.

Apply the 50/30/20 rule to your finances today

Are you using one of the budgeting methods mentioned above? If so, it doesn’t matter how detailed it is – try switching over to the 50/30/20 rule for a few months in order to check whether or not you can save more money overall that way.  

If you haven’t started budgeting yet, it might sound like a big commitment, but once you get going you will wonder why you waited so long! The 50-30-20 plan is simple, flexible and easy to track at home with minimal effort.

Do I need a calculator or app?

No – that is literally one of the perks. While there are many 50/30/20 budget calculators available, the math couldn’t be easier. Simply divide your total income and split into three buckets: one with 50%, one with 30%, and one with the remaining 20%. That’s it!

By Moneypilot

Moneypilot is free to use and completely reader-powered. If you click on links on our website, we may earn an affiliate commission. This may affect which brands we include in articles and comparisons, but it does not affect our editorial opinion.

Leave a Reply

Your email address will not be published. Required fields are marked *