Budget with the 50/30/20 rule
The 50/30/20 rule is a simple and effective way of splitting up your personal finances budget. It’s easy to remember, and can be adapted to your own circumstances and goals.
Let’s take a closer look at what the 50/30/20 rule means, and how it can help you to understand your incomings, outgoings, and building a sustainable long-term budget plan.
Why is it called the 50/30/20 rule?
You can apply this rule to your yearly salary, but it makes more sense to apply it to your monthly income.
Starting with your entire after-tax income. That’s 100% of your available money. With the 50/30/20 rule, you allocate 50% to your needs, 30% to your wants, and 20% to your savings.
Of course, you might need to adjust the needs portion if your rent or bills are particularly high, giving you perhaps more of a 60/30/10 ratio, but the principle remains the same.
Each section: Needs, Wants, and Savings, has its own subcategories, but the point of the 50/30/20 rule is to provide clarity over the key areas of your budget, making them easier to manage.
Let’s now take a look at each of the three sections, and what they mean.
Needs — 50%
The lion’s share of your after-tax income is going to go to your needs. Your needs are your absolute must-haves or must-dos. Be strict with yourself in this section. Takeout food, lottery tickets, treats and holidays are not ‘needs’.
Needs include: Rent, mortgage, bills, debt payments, medical expenses, childcare. Needs are things which, should you neglect them, would come with serious consequences.
Wants — 30%
The beauty of the 50/30/20 rule is that it specifically accounts for your wants, making it more likely that you’ll stick to it, since you’re not being forced into a life of absolute frugality.
Your wants can be anything from a gym membership, to holidays, shopping, basically anything that makes you happier and healthier.
Savings — 20%
Savings, while the smallest segment of the 50/30/20 rule, still accounts for a significant portion of your after-tax income. However, because the amount is small in comparison at only 20%, you’re more likely to abide and honour the rule.
Putting 20% of your money aside each month for savings is easier once you understand that your needs and wants are taken care of.
Why we love the 50/30/20 rule
Having a set formula for the basic categories involved in your budget, makes it much easier to get a clear view of what you can spend.
Knowing that 50% of your money will go towards your needs, leaving 30% for wants and 20% for savings, takes away the stress of trying to guess whether you’ve gotten it right.
And, if your circumstances change, you can always adjust the basic formula to suit, giving you a 60/30/10 rule, or a 40/30/30 rule, or even a 70/20/10 rule.
However you decide to split it, having a rule for your personal finances budget makes a whole lot of sense.