A Full Explanation of the 50 30 20 Rule
Budgeting is incredibly important, especially if you want to save money. Yet, budgeting is something that a lot of people don’t do, and this is mainly because a lot of people expect budgeting to be time-consuming.
A lot of people don’t budget their money, simply because they think they don’t have the time to do it. Budgeting is commonly associated with being time-consuming, and it can be if you create your own, tailored budget. But, if you use a general budget tool, then budgeting doesn’t have to be time-consuming at all.
One of the most popular general budget tools is the 50 30 20 rule. You might have heard of this tool, but there is a good chance that you might not know exactly what it is. In this guide, we’ll be taking a look at just that. So, to find out more about this budgeting tool, keep on reading.
What is the 50 30 20 Rule?
So, first things first, let’s take a look at what the 50 30 20 rule is. As the name suggests the 50 30 20 rule works in percentages. So, this rule dictates that you will separate your income into 3 groups: 50%, 30%, and 20%. Different outgoing payments will be put into different categories, and dividing your outgoing payments into these will allow you to effectively save money. But what are these 3 categories?
The 50 30 20 rule dictates that you should spend 50% of your income on needs, 30% of your income on wants, and 20% of your income on savings/paying off debt. Of course, these are broad categories, so let’s take a look at some examples of what would fall into each of these categories.
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50% - Needs
The majority of your monthly income will go on ‘needs’. These are outgoing payments that you have to pay in order to survive and live your life. So, 50% of your income will go on essential living expenses. This will include things such as rent/mortgage, food and water, bills (electricity, gas, etc.), and transport to your place of employment. Anything that is not considered essential in order to live is not a need.
30% - Wants
The next 30% of your income will go on ‘wants’. Wants are things that you want in order to improve your quality of life, but they are not essential in order to live. This is why a smaller portion of your income will be spent on this. Things that could be considered to be ‘wants’ are subscription services (i.e., Netflix or PS Plus subscription), eating out at a restaurant, and shopping trips.
20% - Savings/Debts
Finally, 20% of your income should go to savings, or to aiding your savings journey. This means that 20% of your income should either go towards retirement contributions, alternative savings accounts, or paying off debt. If you are currently in debt, then you should pay off that debt before you begin saving money (but you should make retirement contributions).
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Does the 50 30 20 Rule Work?
As you can see, the 50 30 20 rule is a fairly simple budgeting technique. It isn’t incredibly time-consuming, and all you need to do to apply it to your lifestyle is separate your income into 3 percentile categories. Working out 50% of your income is simple, and then all you have to do is divide what is left by 5. Your money can then be divided in a ratio of 3:2. With the overall balance for each category calculated, you simply ensure that you stay within those amounts.
Due to the simplicity of the 50 30 20 rule, a lot of people question if it is effective. But, by all accounts, the 50 30 20 rule works. It is basic, but it allows you to save a minimum of 20% of your income every month. Likewise, if you are in debt, the 50 30 20 rule allows you to pay that debt off, without it impacting your day-to-day life too greatly.
But, just like all budgeting tools, the 50 30 20 rule is only as effective as you make it. Budgeting requires discipline, so it will only work for you if you stick to the categories, and don’t overspend in any category. In order to ensure this, you have to fully understand the 50 30 20 rule, so let’s take a look at how to use it.
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How to Use the 50 30 20 Rule
In order to apply the 50 30 20 rule, you first have to take a look at your monthly income. Most of the time, this will solely consist of your salary. However, you might have additional revenue streams that will increase this, or you could be applying the 50 30 20 rule to your entire household (so you may also include your partner’s salary too).
You then need to take a look at your bank statements in order to calculate your average monthly spend. From here, you will be able to categorize your expenses into 3 categories: needs, wants, and savings/debts. So, you will move your regular monthly outgoings such as bills and rent into ‘needs’, then you will move things such as costs of eating out and subscriptions into ‘wants’. Finally, you can put things such as monthly debt payments, or monthly retirement contributions into ‘savings/debts’.
Next, you should calculate the actual percentages of outgoing payments. This might not fit completely into the 50 30 20 rule, but you can usually make small adjustments to fit them into the categories. Then, you ensure that you stick to your budget. A lot of the time, you will find that your ‘wants’ and ‘needs’ comes below the 50% and 30%, meaning that you can save/spend more on paying off debt than the original 20% that you budgeted.
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Is the 50 30 20 Rule Effective for Saving?
Finally, let’s take a look at whether, or not, the 50 30 20 rule is effective for saving. As we said earlier, yes, the 50 30 20 rule is effective for saving. That is because with the 50 30 20 rule, 20% of your income every month will go to savings. This means that at a minimum you will be able to save 20% of your income every month.
However, if you are looking to save a specific amount of money, the 50 30 20 rule isn’t the most effective method. That being said, you could simply adjust the ‘savings’ percentage to fit your needs. Of course, you will only be able to do this within your means, and you shouldn’t go without ‘needs’ in order to save money. Where necessary, you should reduce your ‘wants’ to supplement your savings.
But, if you are just looking to save a small amount, and your main focus is reducing your ‘wants’, then the 50 30 20 rule is very effective. As we said earlier, a lot of the time, your ‘needs’ and ‘wants’ will total less than the 80% of your monthly income budgeted for them. So, you will often be able to save more than you expected.
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In short, the 50 30 20 is a budgeting rule that allows you to spend 50% of your monthly income on ‘needs’, 30% on ‘wants’, and 20% on savings/paying off debts. It is a basic budgeting rule, but it is incredibly effective, and straightforward to use if you are new to budgeting.
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