How the 50/30/20 Rule Will Change the Way You Look at Your Money

Budgeting is no doubt one of the most important parts of personal finance management. However, categorizing and tracking every single expense is so time-consuming that many people just don’t do it.

If you’ve been living without a budget because it takes too much work, your time for excuses has come to an end.

The 50/30/20 budget has recently emerged as a favorite of minimalists according to the budgeting app Mint. Even U.S. Senator Elizabeth Warren praises it in her book All Your Worth: The Ultimate Lifetime Money Plan.

If you are looking for an easy way to budget your expenses, the 50/30/20 rule may be perfect for you.

What is a 50/30/20 budget?

The 50/30/20 rule, also sometimes called the 50/20/30 rule, is a budgeting method that breaks up your expenses into three main categories: needs, wants, and obligations.

The 50 stands for the 50 percent of your budget allocated to “needs.” These are your absolutely necessary expenses you must pay for to survive. Mortgage and rent, groceries, transportation, and minimum payments on loans or credit cards make up this category.

The 30 stands for the 30 percent of your budget you spend on discretionary expenses. This is the catch-all bucket for everything else. Cable subscription, cell phone bill, entertainment, dining out, and traveling are common expenses in this category.

The 20 stands for the 20 percent of your budget allocated to financial obligations. In this category, you would include retirement contributions and emergency fund savings. Extra loan payments to get out of student debt early would also be in this category.

When you add everything up, you get 100 percent of your budgetary expenses.

Note that this budget does not include things like taxes and health insurance. That’s because those are typically taken out of your paycheck by your employer. The budget here is based on your net pay, the money you receive after everything else is taken out.

Is the 50/30/20 rule too simple?

The 50/30/20 rule makes very general assumptions about your budget and your spending.

However, some people have massive student loan payments that take up nearly half their income alone. Others are debt free, and are trying to save for a future home down payment. In those cases, the 50/30/20 rule does not make as much sense.

Yet overall, for many people this budget method will work. And, if you weren’t budgeting at all before, this is a huge step forward.

When you plan for your future monthly spending, do you use a budget? Do you plan at all, or just figure it out as you go? If you don’t use a budget already, this method could be a great way for you to get started.

It also takes less time and effort than some traditional budgets, where you plan every expense down to a specific category. But, it’s also more detailed than a budget where you just track how much you have in the bank and make sure to spend less.

But if you do use this method to budget, remember that the 50/30/20 percentages are guidelines, not rules. There is a little wiggle room you can take advantage of.

Try to grow the 20 percent part

Financial wisdom tells us that saving is better than spending, particularly with the power of compound interest.

“Pay yourself first,” budgeting says that we should focus on retirement, emergency funds, and other long-term financial goals first. Then we should figure out how to make it work with the money leftover.

Jim Wang, the founder of finance sites Bargaineering and Wallet Hacks, says “If you hate the idea of budgeting but still want to save money, give the ‘Pay Yourself First’ method of budgeting a try.”

Additionally, Wang says, “Aim to save at least 20 percent of your money first, then allocate the rest to spending and you won’t have to save another receipt again.”

Because the 50/30/20 budget defines that category as only 20 percent, you could be shortchanging your future.

In fact, the Center for Retirement Research at Boston College found that individuals earning the average wage should be saving at least 15 percent of their income for retirement alone before looking at things like emergency funds and other savings.

If you are going to use the 50/30/20 rule, consider shifting around the percentages a bit to focus more on savings, investments, and debt payoff. Maybe even make it the 50 percent category, then split the remainder of your living expenses and fun spending into the other 50%.

The more you save and the faster you can get out of debt, the better.

Your finances are unique

No two people have exactly the same financial situation, so the 50/30/20 rule may not fit perfectly. However, for people without a budget or those new to budgeting, these are excellent guidelines for getting started.

Once you get up and running with a 50/30/20 budget, analyze your spending a little more to see how you can grow the 20 percent. If you can grow your savings while keeping expenses in check, you will be setting yourself up for a great financial future.

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