If you’re looking for a better way to budget, then you might want to check out the 50/30/20 rule. Although it has “rule” in its name, it’s more of a general framework that can support you as you develop and follow a budget. It’s a straightforward concept made popular by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi that divides your income into needs, wants, and goals.
Ready to know more? Here’s what you need to know about the 50/30/20 rule.
What Is The 50/30/20 Rule?
The 50/30/20 rule is a series of simple directions to guide you through the budgeting process. With it, you can divide your post-tax earnings into these categories:
- Needs (50%): Basic living expenses, such as your housing payment, good, utilities, and medicine.
- Wants (30%): Discretionary purchases like your hobbies, dining out, subscription services, or vacations.
- Financial goals (20%): This accounts for your savings, such as retirement, down payments, 529 account contributions, and debt payments.
Keep in mind that the 50/30/20 rule is a framework for the planning stage of budgeting. That means you need to use a budget tracker like Mint or Quicket for this method to work for you. You can set the three ratios as your goals once you find the right tool for you.
How To Use The 50/30/20 Budget Rule
It’s safe to say that most people spend more than they should when they could be saving more. The 50/30/20 is useful because it helps you be more mindful about your spending habits so you can adjust them accordingly. By limiting nonessential purchases, you’ll have more money to set aside for your financial goals.
Here’s how to use the 50/3020 rule:
- Determine your monthly income: Calculate how much money you deposit in your bank account every month. If you’re enrolled in your employer’s retirement plan, ask how much they withhold and include that amount in your after-tax earnings. If you estimate your taxes, lower your monthly wages correspondingly.
- Find out how much you should spend on needs, wants, and financial goals: Multiply your post-tax income by 0.50 for needs, 0.30 for wants, and 0.20 for financial goals. These figures are your spending threshold.
- Use these numbers to make your budget: Next, write down your monthly expenses for each category and calculate the total for each. This shows you if you’re spending less than the monthly goals you defined in Step 2.
- Stick to your budget: Follow your monthly expenses and adjust whenever necessary, so you make sure your spending aligns with each category.
Why The 50/30/20 Rule Works
Many people feel confused or overwhelmed when it comes to their finances — two things that make it difficult to better themselves financially. The 50/30/20 method is ideal because it removes the more daunting aspects of personal finance, making it easier to get started.
You might not take the extra step by monitoring how well you follow your targets. Even so, this strategy is beneficial for understanding where you stand financially.
As with most things, the 50/30/20 rule isn’t for everyone. While a practical and worthwhile approach to budgeting, there are a few considerations you should keep in mind:
- It’s not always black and white. Categorizing your purchases by needs and wants can be difficult. For example, while food is certainly a need, some products could be considered wants (such as soda or junk food).
- Low-income earners might struggle to meet the 20% savings target. Sometimes, you can only cut costs so much, especially if you’re feeding a household. This also includes people who live in areas with a high cost of living.
- If you have lofty financial goals such as early retirement or a luxury vehicle, saving 20% of your monthly income might not be enough.
- You still have to monitor your spending. The 50/30/20 rule is just one part of a whole when it comes to budgeting. You should aim for these ratios, but if you don’t stay on top of your spending, you won’t know if you’re meeting them.
With that in mind, the 50/30/20 rule is just one way to help you plan a budget. You can supplement it with other tools and methods to make it work for your situation.
- VanSomeren, Lindsay. “Keep Your Budget Simple With the 50/30/20 Rule.” The Balance, 4 Apr. 2020, www.thebalance.com/the-50-30-20-rule-of-thumb-453922.