2 weeks ago Last updated March 31st, 2021 44 Reads share

What is the 50/30/20 Budget Rule?

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When it comes to managing your finances, there are various rules that you can look into. All these rules are meant to help you allot sufficient funds for your expenses while being able to save and invest in parallel. This article tackles one specific rule and this is the 50/30/20 budget rule. Read on and find out how it will be able to help you become better at money management.

50/30/20 Budget Rule in Brief

The 50/30/20 budget rule, conceptualized and popularized by Sen. Elizabeth Warren, is a way of allocating your money into three main categories. These categories include needs, savings, and wants. When you are keen on using the 50/30/20 budget rule, then you will most likely have enough funds to cover your basic needs, while in parallel, having an ample amount of money allocated for your savings and other things that you may want to spend on like travel and leisure. While this may not be a hard rule on how you should budget your money, it serves as a sound guideline that will be able to help you achieve your financial goals.

How It Works

More often than not, people save too little while spending too much, sometimes, even much more than they earn. In this case, the 50/30/20 budget rule will be able to help you limit any overspending habits and transform your under-saving practices. This means that you may need to sacrifice spending less on the things that don’t matter too much while saving more for the things that do.

Determine Your Income

To begin with the 50/30/20 budget rule, you first need to determine your overall monthly income from all sources in case you have more than one. This means that you need to add up all your receivables in all your accounts each month. From there, you need to subtract all your deductibles such as the taxes that you need to settle.

Calculate Your Budget for Each Category

As soon as you have a good idea of your overall monthly income, the next thing that you need to do is to calculate a spending threshold for each of the categories. This means that you need to allocate 50% of the total monthly income you have identified for your basic needs. 30% of that, you can allocate for your wants, while 20% should be reserved for your savings.

You then need to plan your budget according to the numbers that you arrive at. For instance, if your monthly income is $5000 a month, then $2500 of that should be allocated for your basic needs. $1500 of your income should be budgeted for your wants, while $1000 should go directly to your savings. When you have planned your expenses accordingly into these three buckets, exert the effort to stick to your budget plan.

Needs

With the 50/30/20 budget rule, half of your monthly income should be allocated to your needs. These are the things that you won’t be able to live without such as your mortgage or rent, utilities like electricity and water, as well as your food and groceries. Just keep in mind that in this category, you should not include any additional items such as dining out or subscription to streaming services.

Wants

Under the “wants” category, you can include the things that you like to spend on, even if you don’t necessarily need them to survive. This can account for 30% of your income. For instance, when you spend on your hobbies, that should fall under this category. This is true with what you spend for vacations, travels, or even dining out. All the items in this category are considered optional and if you want to save more, you should cut down your expenses in this category.

Savings

Your savings should at least be 20% of what you earn. There are various ways on how you will be able to save money. For example, you can work your way in generating an emergency fund in a savings account on a certain bank. You can also consider putting your savings in the stock market, investing according to your risk appetite. There is also the option for you to get life insurance that you can use for your retirement. With ample savings, you will be able to achieve your financial goals in the long run.

Challenges in Meeting the 50/30/20 Budget Rule

Like with any financial planning technique, the 50/30/20 budget rule can also be quite challenging, particularly for certain scenarios. For instance, it can be quite difficult to sort out your spending depending only on three categories. This rule can also be hard to implement, especially for low-income individuals who are merely trying to make ends meet every day. In this case, if they are already having a hard time making the money that they need to spend for their essentials, then having the income allotted for savings can even prove to be more challenging.

Under the 50/30/20 budget rule, the percentage that you allocate for savings may still be insufficient to meet your financial goals. This is true particularly if you also have big goals of purchasing a property in a high-income area. Another grain of salt when it comes to this budget rule is that you still need to track your budget and how you spend your money. Fortunately, there are already various apps and tools that you can leverage for this purpose.

Other than this budgeting rule though, you can also explore some other techniques that will be able to help you have a healthy financial state. For example, you can also research the 80/20 rule, as well as the 70/20/10 rule, to find out which one is most suitable for you.

The 50/30/20 budget rule is intended to help you manage your finances better by making sure that you have enough money allocated for your basic needs while having the capacity to save and spend some for your wants like travel and leisure. Just keep in mind that having enough savings is important for your overall financial health. In the end, you will be thankful that you have allotted ample funds for savings and investment.

Ana Young

Ana Young

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