Don’t Lose A Penny!

A re you wondering what is the 50-20-30 budget rule and how it can help you manage your finances? Popularized by Senator Elizabeth and Amelia Warren —in the book All Your Worth: The Ultimate Life Money Plan— this budget rule is a guide to help you account for your finances. 

It can be pretty stressful when you can’t account for your expenditure. And it is more frustrating when you don’t have savings or investments, yet you earn money every month.

This article offers a deeper look into the 50/20/30 budget rules and how it works.

How Does the 50-20-30 Budget Rule Work? Is it Weekly or Monthly

In a nutshell: the 50-20-30 budget rule is a money management strategy to help you split your net income— also known as after-tax income— into three categories. These distinct units are; Absolute needs, wants, and savings.

This budget rule can be pretty helpful, especially if you earn income and have difficulty settling your bills and saving some.

Also, the 50-20-30 budget rule works best when creating your monthly personal budget.

Let’s break down this rule and see what each distinct category stands for and how it works.

50% of Your Net Income Goes to Your Absolute Essentials

Once your net paycheck hits the account, you can take 50% of it to pay for the absolute needs.

So what are these life needs that take a considerable chunk of your monthly net income?

Absolute necessities are those irreducible minimums that you must pay for every month.

Think of basic life needs like food/groceries, housing, healthcare, insurance, transport, utilities, etc. 

Remember, items that fall in the needs category can vary—but the thumb rule should be basic— depending on your priorities.  

This budgeting rule is flexible, and so it is up to you to list down all your monthly expenses and determine the ones that best fit in this category.

What happens if the money you spend on your monthly essentials exceeds 50% of your income?

It happens that sometimes the money you need to cater to the basic needs is more than half of your income.

You can focus on limiting your wants, perhaps, or rechecking your lifestyle to reduce unnecessary expenses.

Alternatively, you can work on creating a perfect side hustle that brings in money to help you achieve your money goals. 

20% of Your Net Income Goes to Your Savings, Investments, and Debt

In this category, you focus on allocating 20% of your net income to savings, investments, and settling debts.

You can contribute to your 401(k) account, Roth IRA, brokerage account, emergency fund, etc. Furthermore, you can take a portion of this 20% and payout any debts you may have—it could be a credit card debt or a personal loan.

Remember, if your 401(K) savings are deductible through your employer, you can still count it as part of the 20% that goes to savings and debt repayment.

Sticking to a saving plan can be quite a hassle, and this budget frame can be perfect for keeping in check with your saving and debt payment goals.

30% of Your Net Income Goes to Your Wants

This is the last category in the 50-20-30 budget rule, and this money takes care of the wants. You know, things like entertainment, shopping, luxury upgrades, etc.

When creating a boundary between needs and wants, there can be quite a gray area. 

The best idea is to take wants as something you desire to own or enjoy but can’t stress you if you don’t get it.

For instance, eating out instead of cooking your meal at home is a want. 

Do you want to watch Hulu or Netflix? These belong to the wants category, and you can use the remaining 30% to pay for them.

Do you need to shop for a new smartphone or clothes? Those things show your lifestyle and make your life enjoyable, but you can afford to live without them if circumstances force you.

Remember, what works for someone else using this 50-20-30 budget rule may not necessarily work for you.

How To You Use the 50-20-30 Budget Rule?

The 50-20-30 budget rule is the most straightforward budgeting frame to implement.

First, you need to evaluate your monthly paycheck. Your take-home pay is the total amount you receive after tax and other deductions withheld during your pay period. 

Also, you might want to add the amount you contribute to your retirement plan to your net income.

Understanding your monthly net income is crucial as it gives you a solid clue on how much money you have to spend and the things to prioritize.

Once you have the actual income figure to work with, you can now allocate that income to each category of your monthly expenses—that is, needs, wants, and savings/debt/investment.

The next step is to budget the money in each expenses category to see if the income fits the 50-20-30 budget rule.

Like I said earlier, budgeting can be quite confusing, and the best way to ace this is to use a budgeting app. 

There are many budgeting apps you can consider on Google Play and Appstore.

Try out the Goodbudget budgeting app that’s available on Apple and Android. This budgeting app focuses on envelope budgeting systems to allocate your income to specific spending categories.

Once you create a budget that works for you, it is imperative to keep track of that budget to understand things to add/remove from the budget.

Again, you can use a budget tracking app if you need an easy and seamless way to keep your monthly budget records.

Track your budget and make changes until it consistently fits your monthly income. And from there, all you do is rinse and repeat.

Does the 50-20-30 Budget Rule Help Save Money?

The 50-20-30 budget concept is to help you be smart with your money. If this rule works for you and you can stick with it, it can help you clear debt, save money and settle your monthly bills without a hassle.

If you have loans to pay, it might affect your saving goals as you have to split the 20% to cater to both expenses.

But not to fret! Paying down debts is an excellent financial goal, and there is no problem with that. 

You can start other income streams to help you achieve your saving goals.

Pros and Cons of 50-20-30 Budget Rule

Like any other money management principle out there, the 50-20-30 budget rule has its benefits and downsides.

One reason why the 50 20 30 budget rule works is that it is straightforward. You only need to allocate your monthly income to three “baskets” —needs, wants, and savings/debt/investment.

Another benefit is that it helps you track your expenses and keep up with your monthly budget. Nothing feels good than accounting for all your monthly income.

Furthermore, it helps you get some money to spend on things you love—you get 30% of it to enjoy.

On the flip side, though, this budget rule doesn’t consider your current financial life and priorities.

You might have a lot of debt to settle, yet this budget rule allocates only 20% of your net income to savings and debt management.

Another thing is that it can be quite a challenge setting a boundary between the things you need the most and wants.

The 50 20 30—synonymous with 50 30 20—budget rule can be an excellent financial blueprint to help you manage your money. However, it is not a one-size for all, and it may or may not work for you.

Find an option that works and stick to it.



"A man who both spends and saves money is the happiest man, because he has both enjoyments."

Samuel Johnson


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