You’ve likely heard of the 50/30/20 budgeting rule if you’ve ever looked into budgeting tips. It is praised by financial experts, money blogs, and financial advisers speaking to those who haven’t budgeted in their lives. There’s a reason why it’s easy to remember, adaptable to use, and many people find it to be effective.
However, ‘works’ is working a lot of magic in that sentence. The 50/30/20 rule can be beneficial for those living in certain areas, making a certain amount of income and whose financial situation is in a certain state. The straight and narrow interpretation.
The 50/30/20 Rule really means
The concept was popularized by the name of Senator Elizabeth Warren, in her book All Your Worth, and the idea is simple. You divide up your after-tax income into three categories:
50% for needs – things that you truly can’t live without. Rent/mortgage, groceries, utilities, minimum debt payments, transport to work, insurance. These are non-negotiables.
30% for wants – things that make life fun and enjoyable, but that you can survive without. Eating out, streaming services, travel, hobbies, new clothes (other than basic necessities). This is the area where most people overspend and feel the most guilty, and many who do have given the area a bucket all on its own.
20% (savings and debt payment) – this is what you build your future. Save towards an objective, pay off debt above the minimum, retirement savings, emergency fund.
All the structure of that. The great thing about it is that you are allowed to buy into what you like (30%) and at the same time have the ability to pay the essentials and develop money progress.
A Real Example of How It Looks
Your net income after taxes is $3500 per month. A 50/30/20 split would take the form of this:
You need $1750 for rent, groceries, bills, transportation, etc. You would like to save $700 and pay down debts. You spend $1050 on things you want, like restaurants, entertainment, subscriptions, etc.
Even if your rent is $1400, you can see the difficulty and how much you have to save for all the other “needs” is only $350. That’s why the rule is a great starting point but sometimes must be tweaked according to reality.
Suitable for use in areas where it performs best
The 50/30/20 rule is truly a great place for someone who is new to tracking expenses. There is no need to classify each and every item the user buys, it provides a framework with three buckets, and it makes it abundantly clear that spending money on stuff is fine (however, up to a point).
It also scales. The percentages remain the same regardless of your income, $2,000/month or $8,000/month. It’s easy to check: Just take a look at your bank statement from last month, grouping your transactions into three broad categories and comparing the percentages to see if they’re close.
When things get complicated
For the 50% need category, it is assumed that costs for housing, transportation, and essentials comprise about half of your income. That doesn’t hold true in costly cities very long. If you are renting and paying $2,000/month on a $4,000 take home pay, you’ve already spent half of your money before even purchasing a single grocery item.
In such instances, the rule is not useless, it just needs to be tweaked. Some individuals have split their budgets as 60/20/20 or even 70/20/10, depending on their actual cost of living, but still maintain that principle: first the needs, then some of the wants, and then some of the savings.
The other restriction is that it is not always simple to distinguish between needs and wants. Could you be a gym member who exercises for free, or one who exercises to keep him/her mentally healthy, which is a need? Is it a need because of the commute time or a want because it’s a little nicer? It’s not a right-or-wrong question, but rather a question that must be honestly answered in order to be applied correctly.
The 20% is the part that actually changes things
Of the three buckets, the one that most directly affects your financial situation over time is the savings and debt repayment bucket. The 50% and 30% keep your life on going, but the 20% is what makes your life take momentum.
Then, 20% is too high, go with what you can and build up slowly. Any percentage, even 5% or 10% consistently directed toward savings or debt is a positive step in the right direction and can be done as you can.
How to Actually Try It
The first step is to know how much you make after you’ve paid your taxes. Step two is reviewing the expenditures from the previous month, which are approximately categorized into needs, wants and savings. Step three is making a comparison between these approximate numbers and the 50/30/20 numbers, and determining where the differences lie.
You don’t have to use an application or a spreadsheet to get started. If you have a piece of paper and your last bank statement, you can discern whether you are in the ballpark or way off in one direction or the other.
Well, Does It Actually Work?
Yes for most people that have not experienced any type of budgeting framework whatsoever. It adds structure while not being obsessive, it normalises spending for fun, and it makes saving second nature.
It might need to be adjusted for individuals in high cost areas as well as those with lower incomes as well as/or high debt loads. The underlying concept ensures that you benefit yourself, enjoy your life within reason, and always set aside some for yourself is sound, regardless of the percentages being 50, 30 and 20.
The cheapest budget is the one you’ll actually spend. The 50/30/20 rule is relatively close to that for many.
Disclaimer:
This article has been prepared for general information only and is not intended to be financial advice. If you need any advice specific to your situation, seek advice from a licensed adviser in finance.
