The Rule of 50/30/20 – What if I told you there is a way you can exponentially grow your money this year, would you be interested? Today we are talking about the 50/30/20 budget rule. I know you have probably heard or maybe come across this rule before, and you might even know a thing or two about this rule. But, in today’s, we will explain exactly what this budget rule means, how to use the rule, and what not to do so that you can meet your financial goals.
The 50/30/20 rule happens to be one of the best and most popular tools for people who don’t have time to track all their spending but want an easy way to manage their expenditure, save money, and control their money. The rule works like this; it requires you to divide your expenditure into three categories.
- Your Needs
- Your Wants
- And Savings or debt
To help us illustrate this rule, I’d like you to say hello to John. John’s an average guy who makes $4500 a month after-tax. Using the 50-30-20 rule, John will need to divide his money like this. 50% of his money which is $2,250 will go into his needs, 30% which is $1,350 will go into his wants and 20% which is $900 will go into his savings, or paying off debt. Just like John you too will need to divide your income into those categories. Simple right? But let’s look at it a little closer.
The Rule of 50/30/20: How to Budget Your Money More Efficiently
Step 1: Limit Your Needs
Needs are things you can’t live without. These include things such as housing, health, transportation, utilities, food, paying off debt, and the bare minimum for clothing, shoes, and other living supplies. Only include items you can’t survive without in this category.
If you don’t have a budget this would be the ideal time to create one. Carefully analyze what you spend your salary on each month within this category. Warren and Tyagi, who are financial experts say this category should not exceed 50% of your monthly income, if it does, then something is wrong!
If you do however spend more than 50% of your paycheck on your needs, don’t panic. All you need to do is carefully evaluate what you spend your money on each month. A good rule of thumb is to track your expenditure so you can have a good picture of where your money goes.
Once you know where your money is going, adjust your needs by reducing unnecessary expenditures or finding cheaper alternatives. Once your budget matches the 50% limit, you can now proceed to the next step.
Step 2: Define Wants
Now a whole 30% of your paycheque going towards your wants may sound like a whole lot of money, right? You may be picturing a nice pair of shoes or that new iPhone that got released, the other day. As nice as all those things are, we are not talking about buying your deepest desires.
By Wants, we mean expenses you can opt-out of spending on but your life would be harder without them. I’m not sure your life will be any harder without that new phone, but you might find it hard to communicate without a mobile data plan.
This category should include things like your internet plan, data plans, home cable bills, mechanical, not cosmetic repairs to your car, and so on. I bet you now get it! Sometimes it may be hard to distinguish between needs and wants. But the rule of thumb when it comes to defining a want is by asking yourself if you can live without it, and if you can then it’s most likely won’t.
Step 3: Save Up
The final 20% of your paycheque should go towards your savings and paying off debt if you have any. This money can be used as an emergency fund, a deposit for a home, for investing, or savings for retirement. If you feel as though that 20% isn’t enough, you can transfer more money from your wants list into this account.
Now, let’s talk about the types of debt that should be included in the 20% category. The only debt that should go into this category is that which is above the minimum required payment. For example, additional credit card payments, or extra payments on the mortgage to clear your debts faster should go into this category.
The minimum debt payments should go towards the needs category. The reasoning behind this is that the minimum required payments are compulsory and failure to pay them would cause adverse effects on your credit status; something you just can’t live with.
The 50-30-20 rule is great because, it helps you track your expenditure easily, having just three categories creates a structure that is easy to follow and helps one to focus and manage money better. It’s less detailed making it ideal for individuals who have busy lifestyles and minimal time available in a day.
The rule works well for people within the lower income brackets, between $100 – $6000 It’s however not ideal for high-income earners because they would be forced to spend unnecessary money on needs.
The 50-30-20 rule has helped many people get their finances on track. So many financial experts swear by this rule. Many people who have been in horrible financial ruts have made it through by following this guide accordingly. You too can be one of them if you apply it today! Well, that’s it for today folks.