Understanding finances and increasing your financial well-being, as well as knowing how to budget your income is an important skill to help navigate your financial future. And, with the 50/30/20 rule, it doesn't have to be overly complicated.
What Is the 50/30/20 Rule?
The 50/30/20 rule is a simple method for budgeting monthly net income into three major categories: 50% to needs, 30% to wants, and 20% to savings. Originally introduced by Elizabeth Warren in her book titled, All Your Worth: The Ultimate Lifetime Money Plan, it is now a widely used concept for people looking to plan their spending and reach long and short-term financial goals.
Before you begin analyzing your finances, consider downloading apps like Mint or PocketGuard. Both apps are completely free and offer financial snapshots at your fingertips through a secure connection to your bank accounts, credit cards, investment accounts, and loans. These apps also allow you to create goals, such as paying down debt or saving for a new car and provide guidance on realistic timelines to reach them. Not only can downloading these apps help you see your progress, but they also help you determine which budgets you’re exceeding and what you can afford to spend. All very helpful components of budgeting.
Now for the real work.
Using the 50/30/20 Rule
The first step of the rule is to calculate your monthly net income - this is the amount you take home after taxes (or the amount listed on your paycheck after deductions). This is the total you’ll use to divide into 50%, 30%, and 20%.
The majority of your income will be dedicated to necessities, like rent or mortgage, utilities, insurance, groceries, transportation, childcare, and any other expenses that you can’t avoid. Remember, categories such as eating out are not considered necessary (you can cook at home!) and should live in the 30% section of your budget.
30%: Wants and Desires
The wants and desires category is where it’s easiest to get off track. Consider this category as non-essential spending, like eating out, going on vacation, or monthly subscription services (Netflix, Spotify, Disney+), and entertainment. Spending like this can be fun, but it’s essential to understand that spending in this category should not be an everyday occurrence. If you find yourself overspending in this category, it may be time to cut out some expenses. Here are a few ideas:
- Unsubscribe from duplicate services. Do you really need Apple Music and Spotify? Probably not.
- Eat out less (a lot less).
- Cancel unused memberships (like the gym membership you promised yourself you’d go to five times a week but haven’t visited since).
You don’t have to cut every single non-essential expense out of your budget, but if you take the time to comb through it, you’re bound to find things to nix.
20%: Savings and Debt Payoff
This budget category is set aside for savings and debt payoff and often looks different for everyone. All savings, such as saving for a new car or vacation, retirement accounts, or even college can be assigned to this category. Additionally, debt payoffs, such as credit cards and loans, can also be applied here. This section has many sub-categories but is an essential component of the budgeting process and will help you stay on track.
Ways to boost your savings accounts:
- Sell clothes and accessories on apps like Poshmark and ThredUp, or to stores like Plato’s Closet.
- Add annual bonuses, pay increases, and other additional income into your savings and retirement accounts.
- Get a part-time job, like becoming a driver for Uber or delivery service personnel for Shipt.
- DIY before you buy. You may even have fun getting crafty!
- Make a grocery list...and stick to it.
- Pack your lunch for work or school.
- Become a part-time pet-sitter on Rover. If you’re working from home, this is an easy way to increase your monthly income while also spending time with your neighborhood fur friends.
- Shop on sites like Facebook Marketplace or Nextdoor before purchasing full-priced items at the store.
Challenges of the Rule
Like most things in life, the 50/30/20 rule is not one-size-fits-all, and different budgets can call for different strategies. While it can help everyone stay on track, the breakdown can look different depending on your income and goals.
As a general rule of thumb, your budget should be broken down into similar percentages. If it is slightly off you can consider talking to your financial institution or a wealth management expert about your financial health to help you get on the right track. Regardless of how you approach the situation, budgeting should be a part of your everyday life to help achieve your long-term goals.