Life is busy. Maybe you've noticed?
With so many competing priorities, it might be easy to lose track of where all your money went. That little gap right there is where a budget comes in.
Unlike what you might have heard, making a budget isn’t about restricting yourself. On the contrary, budgeting actually gives you the freedom to spend money on the things you love.
So maybe you're new to budgeting and would like a simple budgeting method to start out with. Or maybe you just prefer flexibility over extensively tracking your money.
If that's you, then the 50/30/20 budget rule might be a good fit for you.
Want to see how it works? Well, let's dive in and find out more about the 50/30/20 budget and see whether it’s the best way to budget for you.
Related: What are the main budgeting methods?
The 50/30/20 Rule Budget Explained
What is the 50/30/20 Rule Budget?
First popularized by U.S. Senator and bankruptcy law expert Elizabeth Warren and her daughter Amelia Warren Tyagi, in their 2005 book All Your Worth, this simple and intuitive budgeting method involves dividing your after-tax income into 3 distinct buckets to help you prioritize your monthly financial commitments:
- 50% to needs and essentials such as housing and food
- 30% to wants such as travel and cocktails
- 20% to savings and debt repayment
Category 1 encompasses your needs, which you cannot live without. These include housing, food (nope, not fine dining or take-out, just groceries you need to basically stay alive), utilities, health insurance, utilities, debt payments, car payments, transport.
A good rule of thumb is to keep your housing costs less than 30% of your income. Millennials are sadly spending a whopping 45% of their income on rent alone according to a new study.
Category 2 is for the fun stuff - your wants like travel, clothes shopping, new phone, getting your hair done. Yes, this is where your fine dining and take-out live!
Finally, category 3 is for your savings and additional debt-repayment.
How to create your 50/30/20 rule budget
1. Calculate your monthly after-tax income
First off, add up your income factoring in all sources such as your full-time job, side hustle and even dividends. Write down this number.
2. Allocate 50% of your income toward needs
List all the essential expenses that you cannot live without - housing, food, utilities, health insurance, utilities, debt payments, car payments, transport. Add them all up and ensure they do not surplus 50% of your income.
Here's the important part. If you’re spending more than 50%, you may need to re-evaluate your spending.
Are you spending too much on utilities, how can you reduce the amount in the future? Perhaps your transportation costs are too high?
The goal is to make changes to your spending within this category to make the numbers align with your income.
3. Allocate 30% of your income toward wants
Go crazy! List out your spending allocation toward all the nice-to-haves that you don’t need. Eating out, going to the cinemas, shopping, etc. The only catch - that the total doesn’t exceed 30% of your income.
4. Allocate 20% toward debt payment and savings goals
This is hands down the most important category for your future. List down your savings such as retirement savings, savings toward a downpayment, etc, and debt payments.
5. Keep track of your spending in each category
Ok, now that you have a budget in place, ensure that you spend the money as allocated. There is no use to set up a plan and no have a system for following it through.
A common recommendation to stay within budget is to have separate bank accounts for your different categories. This way, you can easily know when you have run out of money for us in any category.
6. Automate your finances
Automating finances is one of the best money-managing practices.
So what's the secret?
Automating finances takes away emotions (and oh, there can be so many emotions when it comes to money) so it is easy to incorporate into your current financial strategy.
And get this: Automating your finances is particularly effective when working towards a savings goal, managing recurring bills and in your debt payoff strategy. This has to be one of my favorite ways to save towards a financial goal!
Is the 50/30/20 rule good for you?
Are you struggling to stick to your budget?
Do you often feel like pulling your hair out each month trying to keep track of what feels like hundreds of budget categories?
Are you new to budgeting?
If you answered a resounding yes to any of these questions, then the 50/30/20 budget might be just right for you.
Given its simplicity, the 50/30/20 rule budget would work great for you.
The 3 budgeting categories are broad and quite distinct for a reason. They help you maintain a birds-eye view of what is going on in your finances without drawing you into all the details.
It really is that simple!
Always keep in mind that this is your budget- these allocations aren’t set in stone. You can make the percentage breakouts work for your unique financial situation. It can be a 50/20/30 breakout, a 45/10/45 breakout, 30/30/40 breakout. The point is to make the budget work for you and for your financial future.
With a 50/30/20 rule budget, you can embrace the importance of maintaining a balanced lifestyle and integrating your financial goals on your road to financial freedom.
Who wouldn't want that?
There is no doubt that making a budget is one of the most important ways in which you can improve your financial health and achieve financial goals.
Whether you're new to budgeting, prefer flexibility over extensively tracking your money, are looking to curb your spending, would like to give every single dollar of your hard-earned money a job, or would like to build up your savings, there is a budgeting method for you. Find out what is the best way to budget for you.
So, can you handle it?