Many people have trouble managing their money because they spend too much without following a strict budget. Suppose this sounds familiar and you wish to change your ways. In that case, there is one budgeting strategy that can help you become more financially stable. All you need to do is follow the “50/30/20 rule.”
The 50/30/20 rule refers to a budgeting strategy where you divide your net income into the following three separate categories:
- 50% of your income goes toward your necessities and living expenses
- 30% of your income goes toward your wants and non-essentials
- 20% of your income goes into savings or paying down debt
Do you think you can follow this rule when budgeting? Here is an overview of each category and helpful tips for sticking to this budget.
50% for Needs
Up to 50% of your income must be able to pay for all your living and survival expenses. Some examples of these expenses include:
- Groceries
- Utility bills (e.g., water, electricity, internet)
- Housing rent, lease, or mortgage
- Car payments and gas (or public transportation)
- Insurance payments (e.g., car, health, home)
- All other bills (making the minimum monthly payments on credit cards and debts)
Many people find it difficult to follow this part of the rule because they often live paycheck-to-paycheck, where over 90% of their income goes toward paying bills. Sticking to the 50/30/20 rule will be impossible if you barely make enough money to cover your living expenses.
In that case, you could look for ways to reduce some of your living expenses to allow more income to be devoted to wants and savings. For instance, you could move into a smaller home to reduce monthly rent or mortgage costs. Maybe consider selling your car and relying on public transportation or Uber to get to work or anywhere else you need to go.
If you free up enough funds from your monthly income, use that money to pay off your debts without accruing any new debts. The objective is to eliminate all your debt obligations so that you will never need to make another monthly payment toward a credit card or loan again. That will enable you to free up extra monthly income for your wants and savings.
30% for Wants
Spend up to 30% of your monthly income on items, services, or experiences you want to improve your happiness and overall quality of life. Some examples of things you might wish to could include the following:
- Eating out at restaurants
- Traveling and taking vacations
- Joining a gym
- Subscribing to streaming services (e.g., Netflix, Peacock)
- Seeing a movie at the theater
- Getting a massage
Many things that people want don’t cost as much as they think. Suppose you can free up 30% of your income toward your wants. In that case, you should be able to afford all your general wants without disrupting your lifestyle.
Of course, traveling and vacation are the most expensive things you could want. To afford a costly trip, try creating a special subcategory in this part of the rule where you will save money until you can afford to go on the vacation you want. You don’t have to save 30% each month for your future vacation. Just save some of it.
20% for Savings
The final 20% of your income should go into savings for financial security. Some money should go into a bank savings account as a cash reserve for emergencies, such as car repairs and hospital bills. The rest should go toward building your net worth beyond merely saving the money.
Here are examples of how you can earn money from your savings:
- Invest the money in an investment retirement account (e.g., 401(k), Roth IRA)
- Invest the money in stocks and bonds
- Invest in real estate
- Deposit into a money market account for huge interest earnings
Choose safe investments with lower risk to avoid losing money. The idea is to save to build wealth and a cash reserve for emergencies. If you can do this successfully, you will be ready for future financial obstacles that might get thrown in your path.
One example of a safe investment strategy is to invest in an S&P 500 ETF, such as the popular Vanguard S&P 500 ETF (VOO). This exchange-traded fund invests in stocks listed in the S&P 500 Index, which represents the 500 biggest companies in the United States. That way, your investment will surely pay off in the long run.
A Real-World Example of Implementing the 50/30/20 Rule
Let’s suppose your total monthly net income is approximately $6,000, and your total essential expenses are $3,000. Here is how that might look under the 50/30/20 rule:
50% for Needs
- $1,300 – Rent
- $400 – Groceries
- $300 – Utilities
- $400 – Car payment
- $400 – Insurance premiums (car and health insurance policies)
- $200 – Debt payments
These total necessary expenditures add up to $3,000, which meets the 50% requirement for the needs of the rule.
30% for Wants
- $400 – Restaurants / Dining Out
- $500 – Travel
- $50 – Gym Membership
- $150 – Streaming Services
- $300 – Entertainment
- $400 – Hobbies
Your want expenses will probably look different than this, but it should give you some idea of how you can spend 30% of your monthly income toward the things you want and enjoy. The total wants expenses add up to $1,800, precisely 30% of the $6,000 monthly net income.
20% for Savings
- $300 – Emergency Fund
- $500 – Stocks
- $400 – Retirement
Calculating your savings is much easier because you will have fewer subcategories than the other two categories. In this example, your total savings would be $1,200, which is 20% of $6,000.
Conclusion
The 50/30/20 rule is a smart money management strategy for anyone looking to eliminate debt, build wealth, and live happier lives without much financial stress. It will take some time to implement the plan successfully, depending on your income level and financial mindset.
If you keep practicing to isolate your money into the three categories outlined, you will eventually achieve financial success. All it takes is for you to develop a concrete budgeting plan and a fair bit of discipline to get yourself on the right track.
