If you hate budgeting or don’t have time to budget, this method is best suited for you. The 50/30/20 rule is a simple budgeting method that anyone can use without having any trouble.
Decoding 50/30/20 rule
50/30/20 rule is a simple budgeting method that Senator Elizabeth Warren popularized in her book All Your Worth: The Ultimate Lifetime Money Plan. The basic concept of this rule is to break down your after-tax income into 50 percent for needs, 30 percent for wants, and 20 percent for savings.
50 % needs
Needs are those things which are a must for everybody.
The needs include
- Medical bills
- Utility bills
- Other loans.
You can’t live your everyday life without these, so they are needs.
One more thing to note is that there are some things you may think of as needs, but it is not like subscription services (Netflix, HBO, other memberships).
The 50/30/20 rule states that you should be spending a maximum of 50 percent of your after-tax income for needs. If you are spending more than 50 percent on your needs, you need to check your lifestyle.
Try to live a lifestyle that you can afford. Try changing your expensive house, car, dresses for something you can afford and that fits within your budget bracket.
30 % wants
Wants are the upgrades or extras everybody desires in their life.
- Eating out
- Subscription services
- The list goes on and on
This is the part where people go overboard and mess up their financial situations. Everybody wants something in their life unless you are a non-materialistic person.
So, people spend their money to buy the things they want.
There is nothing wrong with that, but when people buy something they can’t afford, they hurt their financial situation and fall into a debt hole.
Most people want to have their desired things immediately, so they use their credit card or any other borrow now pay later methods to buy these things and increase their debt.
20 % savings
- Emergency fund
- Retirement savings
- Other savings for a specific goal
According to the 50/30/20 rule, you need to save at least 20 percent of your after-tax income.
You can also save more than 20 percent by cutting down your wants.
Most finance experts suggest that you need to pay yourself first after getting your salary, then spend the remaining money on other things.
Every household should have an emergency fund. When you lose your job, get salary cuts, or can’t able to work due to an unexpected accident, the emergency fund will come to your aid.
An emergency fund is a safety net that protects you from any unforeseen situations. So if you don’t have one, you should focus on building one.
Retirement savings is a way to protect your future when you can’t able to work anymore.
By having retirement savings, you don’t have to worry about money on your elderly stage.
How to use the 50/30/20 budgeting Rule?
Most people have trouble with finances because they spend too much and save too little. With the 50/30/20 rule, you can improve your financial planning by focusing on what is needed and not focusing on what is not needed.
Step 1. Calculating monthly income
Find out how much money you receive every month after detecting all of your taxes.
If you are an employee, you can find this in your salary slip.
If you are self-employed or you have an unpredictable income every month, then you have to estimate.
Step 2. Finding each category threshold
Once you found out your after-tax income, multiply your income with 0.50 to find the threshold of the needs, multiply income with 0.30 to find the threshold of wants, multiply income with 0.20 to find the threshold of savings.
Step 3. Pay yourself first
Let’s start with savings because the most important rule of personal finance is to pay yourself first.
After finding out the threshold for each category, you would have found what your savings threshold is.
Step 4. Pay your needs
After paying yourself, pay for your needs.
Since needs are essential to run the household, they should be paid before wants.
Needs include payments related to housing, transportation, groceries, health bills, utility bills, etc.
You should not be paying more than 50 percent of your after-tax income for needs.
Step 5. Spending money on your wants
You can spend up to 30 percent of your after-tax income on wants and don’t go more than the threshold.
Since the rule states that you can spend up to 30 percent, that doesn’t mean you have to spend 30 percent every single time.
You can reduce your spending on wants and direct the money towards your savings.
Wants include things like eating out, vacation, gifts, subscription services, etc.
Step 6. Following the budget
When it comes to budgeting, discipline and consistency are always important.
It applies the same to the 50/30/20 budget rule. You have to follow it with discipline and consistency to get the desired result.
Though the rule may look simple, it’s only effective when you practice it.
Frequently asked questions (FAQs)
Does the 50/30/20 rule work?
Though this budget rule sounds simple, it is not a good fit for everyone, but it works pretty well for most people.
If you are getting by daily with your daily wages or someone with a low salary that all of your income goes to the needs, then this rule will be difficult to follow.
Still, I recommend you save whenever possible because saving money will help you in your uncertain situations and give you financial freedom for the future.
Is the 50/30/20 rule weekly or monthly?
50/30/20 rule is followed on a monthly basis. You need to split your monthly after-tax income into 50 % for needs, 30 % for wants, and 20 % for savings.
How does the 50/30/20 rule distribute your income?
The 50/30/20 rule distributes your income into 50 percent for needs, 30 percent for wants, and 20 percent for savings.
Who created the 50/30/20 rule?
Senator Elizabeth Warren popularized this rule in her book All Your Worth: The Ultimate Lifetime Money Plan.
Does the 50/30/20 rule include retirement savings?
Yes, the 50/30/20 rule includes retirement savings. Retirement savings comes under the savings category.
The 50/30/20 rule is only a simple outline for your budget. Remember never to spend more than 50 percent of your after-tax income on needs. Never spend more than 30 percent on wants. Spend at least 20 percent on your savings.
Once you have a stable lifestyle and don’t want anything more, you can cut down your wants from 30 percent to 20 percent or 10 percent and increase your savings to 30 percent or 40 percent.
Following a budget is vital for living a great life without worrying about your financial situation every month.
Finally, if you have any questions or feedback, please post it in the comment section.