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What is the 50 30 20 budget rule?
The 50 30 20 rule is a method to organize your budget and control your spendings. By using them, you can allocate your incomes in the following categories. The 50 30 20 budget rule is a simple and efficient way to help you manage your money efficiently.
The necessities you require to live. This includes:
- Utilities and many more
What you desire but don’t really need to survive. This includes:
- Fancy cars
20% financial goals
This category covers two main areas:
- All savings, such as house savings and retirement savings
- Debt payments
The 50 30 20 rule was formed by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi. It was designed as a rule of thumb for working-class families to plan and organize their spendings in order to prepare for unforeseen circumstances and the future.
How it works
Calculate your monthly income
Add up all your monthly income and create a sheet to calculate all earnings
Divide your spendings into categories
With this step, you need to multiply your needs by 0.5, wants by 0.3, and your financial goals by 0.2. You’ll get a different number for each category, which is your budget for each one.
Compare to current spending
Now that you have got the numbers, how do your current spendings compare to the budget that you’ve calculated? With this you can figure out if you are spending too much, in which area, or if you don’t have enough savings.
Benefits of the 50 30 20 rule
Good starting point’
There is no need to create any complex graphs or odd calculations, the 50 30 20 rule is pretty simple. It’s a nice and easy way of figuring out how much you should be spending on specific categories each month. by following these percentages, you’ll fall into the right path
Differentiate the needs and wants
Sometimes, it’s difficult to figure out how much to spend on certain things, this rule helps you figure out: is this something you really need, it’ll encourage you to rethink your choice before making a purchase or spending your money.
Stops you from feeling guilty from overspending
Knowing where your budget is going is a big plus. With a budget in place, you won’t feel guilty, the 50 30 20 rule will help you to keep a plan on how to use your money and helps to keep everything in control.
Drawbacks of using the 50 30 20 rule
You can’t break down categories
Unfortunately, living expenses are not considered in this method. The 50 30 20 rule does not include any subcategories, which makes it hard for people to neatly organize their expenses and incomes.
Your categories keep shifting
Habits change frequently, spendings can vary each month: your wants budget can get higher than your needs budget sometimes. Therefore, it can be difficult to get reliable and accurate information using this method.
Video Explanation for the 50 30 20 budget rule:
Budgeting is a great way to be in control and organized. If you are new to budgeting and want to find an easier way to divide your budgets to control your spendings, the 50 30 20 rule is a great start. Following the 50 30 20 budget rule can seem like you can’t enjoy the things you like, but it simply means being more responsible and in control with your money so it can support you in the future by finding areas in your budget where you spend unnecessarily.