Budgeting plays a key role in ensuring you’re set up for financial stability and success. A budget offers a clear roadmap for managing your income and expenses, helping you make informed financial decisions. By creating and committing to a budget, you can gain better control over your spending habits, cultivate a habit of saving, and avoid unnecessary debt.
A detailed personal budget, though, can be difficult to create. The 50-30-20 budget rule is one of the effective tools to help you set up a personalized budget.
Related: How to Create a Budget in 5 Simple Steps
What is the 50/30/20 Budget Rule?
The 50-30-20 rule involves splitting expenses into only three major categories: 50 percent for needs, 30 percent for wants, and 20 percent for savings and debt repayment. The budgeting technique was devised by the United States Senator Elizabeth Warren together with her daughter in their book “All Your Worth: The Ultimate Lifetime Money Plan.”
How to Use It
Start by reading your paycheck and calculating your monthly earnings. Add your salary and any amount obtained from other sources of income. Deduct taxes from the gross monthly income to determine your net earnings.
Create three categories for your budget based on the 50-30-20 budget rule. Allocate 50% of your money to needs, 30% to wants, and 20% to savings. Here is a detailed discussion of each category.
Needs – 50%
About half of your budget is allocated to your needs. This category includes expenses that you must meet for survival and general well-being. Examples of needs include
Housing
Utility bills
Food
Health Care
Transportation
While the needs are necessary for your survival, small adjustments in these expenses can lead to substantial savings. When the budget’s tight, consider trimming your needs by moving to a cheaper house, using public transportation, turning the tap off while brushing your teeth, or doing dishes.
Related: Frugal Living Tips to Save More Money
Wants – 30%
Next, 30% of your earnings is assigned to wants, which are things you do not necessarily need to survive. Simply put, wants are nonessential things you spend money on to make yourself happy. Examples include
Vacations
Furniture
Streaming services
TV subscriptions
Eating out
Electronics
Entertainment
Savings and Debt Repayment – 20%
The remaining 20 percent of the budget will be toward savings and repayment of debts. How you break down this category depends on your circumstances and personal financial goals. If you don’t have a debt, you should assign the full 20% of your net earnings to savings.
The savings can go toward your emergency fund, retirement, and home acquisition. Set up automatic savings to help you overcome the temptation of spending money meant for savings.
Related article: 10 Simple Ways to Save Money
Conclusion
The budgeting method is an effective way to address bad spending habits. The beauty of the 50-30-20 rule is that it provides a clear framework of what you should spend and how much you should be saving. To create a personalized budget fit for your circumstances, you’ll need to consult a financial planner.
