Most people save too little, and unknowingly spend too much. The 50/30/20 rule for budgeting is a way to become more aware of your financial habits and limit overspending and under-saving (by spending less on the things that don’t matter to you, you can save more for the things that do).
Because this is just a rule of thumb for planning your budget you’ll also need to supplement it with a system to monitor spending as outlined in this article.
What is the 50/30/20 rule?The 50/30/20 rule is a guideline for allocating your budget to three categories, ‘needs’, ‘wants’ and financial goals as follows:
50% to Needs
Needs are what you can’t live without, or at least very easily. They include things like:
Rent/Mortgage paymentsGroceriesUtilities, such as electricity and water
30% to Wants
Wants are things that you desire but don’t actually need to survive. They might include:
HobbiesHolidaysDining outDigital and streaming services like Netflix and Amazon.
20% to Financial Goals
How to use the 50/30/20 rule
Calculate your monthly income. Add up how much guaranteed income you receive in your bank account each month.Calculate a spending threshold for each category: Multiply your take-home pay by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals) to see how much you should ideally spend in each category. Plan your budget around these numbers: Think of these three categories as “buckets” that you can fill with monthly expenses. List and tally your monthly expenses under the category each falls into and see if you’re spending less than the monthly targets you established in the prior step.Follow your budget: Track your expenses each month, and make changes where needed, in order to stick to your spending thresholds going forward
50/30/20 Rule vs. Other Budgeting Methods
The 50/30/20 rule of thumb isn’t the only game in town. Here are a few other budgeting techniques to consider:
80/20 Rule: With this method, you immediately set aside 20% of your income into savings. The other 80% is yours to spend on whatever you want, no tracking involved.
70/20/10 Rule: This rule is similar to the 50/30/20 rule but you instead parse out your budget as follows: 70% to living expenses, 20% to debt payments, and 10% to savings.