Chris O'Shea
One helpful way to manage your money is to use the 50/30/20 rule. This strategy can make saving and spending easier by arranging it with a simple formula. Here’s what you should know.
How it Works
The 50/30/20 rule works as follows:
- 50 percent of your income goes to fixed expenses, like rent, groceries, and bills.
- 30 percent of your income goes to wants or discretionary spending.
- 20 percent of your income goes to savings and debts.
Breaking it down
Here is a little more clarity on each of the components of the 50/30/20.
50 percent is also known as your “needs” or “necessities.” This would include things that are vital for your day-to-day life and may include the following:
- Food. Groceries for at-home meals.
- Shelter. Your home mortgage or rent, and homeowners or renters insurance.
- Essential expenses. Utilities, like electricity, gas, water, and internet. Transportation, healthcare, child care, and other insurance.
30 percent is allocated to “wants” or discretionary spending for non-essentials. These are nice-to-haves, but not necessary to survive. The best way to think about this is if your income suddenly stopped, what areas would you cut back on first? This would include the following:
- Entertainment like sporting events, theme parks, movies, concerts, etc.
- Dining out and meal delivery.
- Gym and fitness memberships.
- Personal care, like spa treatments, etc.
- Designer clothing and shoes.
20 percent of your budget goes to savings and debt. This includes things like:
- Emergency savings.
- Savings goals, like a car, home, or vacation
- Investments for short and long-term goals.
- Retirement savings, like a 401(k) at work, IRA, or other long-term savings account.
- Debt paydown on credit cards and other loans.
Benefits of this Strategy
The best part of the 50/30/20 rule is that it makes everything easy. There’s no guesswork involved. It also allows you to cover the basics — like fixed expenses, savings, and debts — while giving you space to spend money on fun things. It’s not suffocating.
Why This Strategy Can Work
If you’re looking for an easy way to sort out your finances, the 50/30/20 rule might be for you. It provides a solid road map for your money. The simplicity of the 50/30/20 rule makes it ideal for people just starting out and unsure of how to budget.
Why it Might Not Work
The 50/30/20 rule might not work for you if you for the following reasons.
- Complicated finances.
- Your main goal is to pay down debts.
- You’re working to stack up savings.
The 50/30/20 rule also doesn’t provide an explicit space for retirement savings, which can create confusion.
Do One Thing: Consider the 50/30/20 rule if you are looking for a simple and straightforward way to budget.
