The 50/30/20 budgeting rule is a simple way to manage your finances. It’s a perfect method for anyone approaching budgeting for the first time.
Unlike many others, it doesn’t involve the detailed budgeting categories.
Instead, you spend 50% of your after-tax pay on needs, 30% on wants, and 20% on savings or paying off debt.
The 50/30/20 rule budget works great if you don’t have time or patience to track hundreds of categories. Under this, you only deal with three.
If this sounds like your kind of budgeting, then read on.
This article will show you what the 50/30/20 budgeting rule is how to use it right to organize your money every month.
What Is The 50/30/20 Budget Rule?
The 50/30/20 rule of budgeting was created by Senator Elizabeth Warren. She introduced this no-fuss budgeting rule in her book “All Your Worth” she wrote with her daughter.
The idea is to use only three essential categories in budgeting to keep it simple.
In a nutshell, this 50/30/20 rule budget has you track and divide all your expenses into only these main categories:
- Needs 50%
- Wants 30%
- Savings or debt 20%
It is designed to minimize the amount of time you spend tracking so many categories. Instead, it allows you to focus on the big picture.
And more importantly, it helps you take control of your finances without hustles.
And the steps are as easy as the method itself.
To start, simply add up all your take-home pay and paychecks. Sum up income from side hustles, spouse’s work, and other extra things.
Next, you figure out the dollar amount (budget) for each category.
50% of your total income goes to “needs”. 30% goes to your “wants”. And lastly, 20 % goes to “debt or savings”.
So if your total after-tax income per month is $4,000, you budget $2,000 to your needs, $1,200 to wants, and $800 to savings or debt.
These are the monthly budgets you need to stay under.
It’s that easy!
With the use of 50/30/20 budget rule, you now know the amount to spend in each group. Now, you need to know which group has which expenses.
You’ll have to find out what goes to each group at your own discretion.
Here are some procedures you can go through for this.
It is important that your budget has needs in them.
Your minimum payments on cards and loans can be added to needs to ensure you allocate enough to cover them.
Also, the slightest amount of supplies for living and clothing can go here too.
Childcare is one item that may be a need depending on your situation. Assess what’s really a need in your life and add those to your need category.
“Wants” are those things you spend your money on that you can live without.
We have the followings in this group:
- Eating out
- Gym memberships
- Cable TV
One thing to note is “Wants” can easily be confused for “Needs”.
If you want to know whether a thing is a want or need, find out if it’s something you can live without. If you can live without, then put it under “Want”.
Savings or debt category is money put aside to pay off debts quickly or for the future.
You can use this money to build up your emergency fund if you don’t have it saved adequately.
Also if you are looking to buy a home in the near future, money can go towards your down payment for the house. Other savings you may want to consider is your retirement funds, education funds, and such.
Another smart money move for this money is to pay down your high-interest credit cards.
To see which card to pay off first, list up all your credit cards and loans including personal and auto. Find out each debt’s interest rate.
Tackle the one with the highest interest first then move to the lower ones.
It’s so important for your personal finances to tackle consumer debt if you have any. It’ll help you improve your credit score and lessen your financial burden.
If you have a high debt balance, I recommend spending less on wants and put the extra to pay off debt. I guarantee you, your short-term sacrifices will pay off big time by taking this step!
Is the 50/30/20 Budget Rule Right For You?
For many people, the 50/30/20 budget rule can be a very effective way to budget. Especially if you are new at budgeting.
There is just enough discipline to give structures to your money coming in and out on a monthly basis.
And that’s what I love about this budgeting method. It’s just so easy to work with and very effective.
But ultimately, your situation is what determines if this method is the right for you.
It may be that these over-simplified categories are not detailed enough for you.
Or if you live in an expensive city, you may find 50/30/20 splits not doable.
If that’s you, know that it’s ok.
The goal here is to find what works best for you, either a well-detailed budget or a budget with fewer details.
What’s most important is to be financially disciplined. And to also have a clear picture of your money coming in and where it’s going.
If you’re like me and not found of complex budgets, the 50/30/20 is perfect. It’s a simple approach to keeping your finances in check.
With only three categories to track, you don’t need to get into small details as you would with other budgets.