The 50/30/20 Rule Easily Explained
By Alex Casella
The 50/30/20 rule is an easy budgeting method that can help manage money and understand how to effectively allocate expenses. This basic rule of thumb recommends taking your monthly take home pay (after taxes and deductions) and prioritizing it by your needs, your wants, and your savings/debt payments.
50% of your net income is directed to the necessities like housing (rent/mortgage, utilities, home or tenant insurance, cable/internet), transportation (vehicle expenses, parking, bus or train fare), groceries, and things you need - not want!
After evaluating those needs, if you determine that these necessary living expenses make up less than 50% of your income, then this is an opportunity to increase the amount your saving, or using toward extra debt payments. Don’t think that extra 5% can be your fun money. While it could, use that additional 5% wisely!
30% for personal, non-discretionary expenses (these are the wants). Going out to restaurants, activities with friends and family, self-care, cosmetics, and whatever retail-therapy you choose that fulfills your desires.
And lastly, 20% (at least) should be dedicated toward savings or additional funding toward debt. Contributions to regular savings and bank accounts, retirement accounts or other forms of savings. Remain mindful of establishing an emergency fund and the differences between a regular savings and a retirement account when considering access to those funds. When there is debt, the key is to balance this 20% between savings and debt balances so you’re able to do both. You don’t want to be in a situation when you need money and you’ve been putting it all toward debt. Balancing is key!
When you have a system that describes how much you can spend on various categories, you’ll be more likely to stick to those allotted amounts and find it easier to decide whether or not something is a want or a need when spending!
In addition to the 50/30/20 rule, some individuals will establish other rules into their spending plan such as limits to the number of times a month they will spend in a certain category or develop a specific cash allowance per week that they can spend.
At times you may need to sit down and modify spending to stay within the parameters of the 50/30/20 rule. At the end of the day, positive cash flow is the place to get to. Which takes time, commitment, and discipline. You got this!