The 50/30/20 rule is a way of planning your spending. You use 50% of your income for needs such as housing, food, and other fixed expenses. Then 30% goes to wants, such as hobbies and leisure activities. And 20% goes toward saving for a rainy day and paying off debt faster.
Despite modern advantages, many families today would go bankrupt after missing only a few paychecks. So, what is the 50/30/20 budget rule? It’s a way to help be ready for the future—while still having a good life today.
How Can Wise Budgeting Change Your Life?
How do you budget your money using the 50/30/20 rule? And what advantages can it give you? This rule of thumb helps to push us into the actions that support financial health and wisdom. Let’s use a modern parable to demonstrate.
Dan and Frank grew up together but took two different paths in life. Frank does a lot of leisure activities, but he hasn’t put any money into savings. He’s living for today and making life a party. People enjoy being around him . . . until he loses his job and runs out of money after one week without paychecks.
On the other hand, Dan budgets his money using the 50/30/20 rule. And he still plays golf; orders gourmet meals for his family once a week, and provides his kids with a good education and vacations. Plus, Dan has paid off his credit cards, and he could pay his expenses using savings for six months during a crisis.
Who would you rather be like? There are people really like Dan out there. Like him, you can still enjoy activities you love while saving up money for a rainy day. By applying some focused thought and creativity to lowering unnecessary expenses, the diligent can have just as much fun with 80% of their income as Frank has with 100% of his.
How Do People Practice 50/30/20 Budgeting?
What percentages should your monthly budget be split into? What goes into each category? Figure out the total monthly income you have available (after taxes), then divide it into these categories and percentages.
Needs include car payments, credit card bills, insurance, housing, utilities, food, minimum loan payments, and other vital expenses of modern life. Everyone has slightly different needs, but you could define a need this way: Your quality of life or safety would seriously suffer without it. Food, medicine, and electricity are examples.
If you’re not sure of the total dollar amount of your needs, estimate it as well as you can for now and adjust it as you go on. Or look through past receipts and add them up.
Wants are activities and things you enjoy, which improve your quality of life but are not strictly necessary. Examples include hobbies, meal delivery, shopping for pleasure, basic travel, entertainment, a high-tier mobile plan, certain memberships, and other personal expenses.
You get to decide how to split expenses between wants and needs. For example, basic clothing purchased at a discount outlet could be a need, expensive clothes from the mall a want. Routine repairs on your car could be a need, cosmetic upgrades a want.
The savings category includes money in retirement accounts for your long-term future, and bank savings account for short-term problems and unexpected expenses.
You can also pay off high-interest debt more quickly. Your minimum debt payments are obligations or needs, of course, but extra debt payments can be in the savings category. For example, if your minimum credit card payment is $50, but you pay $100 toward it, then $50 of that is in the needs category and $50 in the savings category.
What if you can’t save 20% of your income? If you have cut your expenses to the bone and still can’t save very much, start with whatever amount you can. Maybe save only 1%, and put 1% toward paying off a debt faster. As you get used to that, raise each of those to 2%, and so on. Think of saving as a skill you can improve by gradual levels.
How Can You Get Your Budget in Line?
Clients sometimes tell us that their needs are higher than 50% of their income. They ask what to do. What if after looking over your budget you realize your percentages are far from ideal?
First, these percentages don’t have to be exact. You’re not required to spend 30% on wants, for example. If you spend 23% on wants and put an extra 7% toward paying off debt—or some other variation—that may be perfect for you. Think of the 50/30/20 rule as a basic pattern for a healthy budget, which you can strive toward over time.
Next, cutting your expenses can actually be an exciting exercise. You can learn a lot about alternate products you can buy, discounted groceries, better interest rates, low-cost entertainment, and more. You might be amazed that you can maintain an enjoyable lifestyle while spending less—and glad you got rid of expenses you weren’t even enjoying.
Finally, your simplest goal should be this: Lower your total monthly expenses until they’re less than your income. Do anything you can to move toward that goal. Sell some big items, move to a smaller place, pause a hobby, or even pay off high-interest debt with a personal loan.
Build Your Financial Well-Being
If you’re going to be financially wise for the rest of your life, start now. Don’t hold onto any unexamined expenses. Don’t let your total expenses be larger than your income. And don’t go deeper into unsecured debt.
Now that you know what the 50/30/20 budget rule is, take control of your budget using this proven, healthy pattern. And if you need any additional help or advice, contact Lift Credit for expert help with budgeting and getting out of debt.
Start building your financial skills today. You have the capability to master these skills as many others have. So keep learning, and keep going after your dreams.