If you’ve made even the slightest foray into the world of budgeting, you’ve probably come across the 50-30-20 rule which is one of the most popular methods of budgeting in your daily lives. Most financial gurus and personal finance bloggers swear by this method, claiming it changed their entire outlook of budgeting more than any of the other savings tips out there and indeed, most other budgeting and savings tips are built on the fundamental concepts of the 50-30-20 rule. Budgeting for beginners will definitely be a challenging activity, especially until you find a method that works for you and you personalise it to suit your daily expenses. However, the 50-30-20 method is a really solid place to start from, for beginners and seasoned budgeters alike.
What is the 50-30-20 budgeting technique?
The 50-30-20 budgeting rule is a method of allocating your available income across key aspects of your life in the most smartest and efficient manner.
- 50% of your income should be allocated to your “needs”
- 30% of your income should be allocated to your “wants”
- 20% of your income should be tucked away as “savings”
While it sounds simple enough, the 50-30-20 budgeting rule has been found to be extremely effective - and, you might discover, not as easy to do as it seems.
Why is the 50-30-20 budgeting rule so famous?
Initially proffered to the public in a book by US Senator Elizabeth Warren, the 50-30-20 rule resonated across the world not only due to its straightforwardness, but also for its practicality and simplicity. It basically breaks down all your expenses into three different buckets - your needs, wants, savings, which are easy to identify. Furthermore, it works by taking into consideration the actual available money in your hand to spend, providing you with strict limits into which you would somehow need to fit your expenses.
The 50-30-20 rule covers every single type of expense you might possibly have. All your essential and fixed expenses come under needs; it helps you save and/or contribute to debt settlement, and it even provides you with some spending money for you to really live your life. Allocating money towards wants makes the 50-30-20 rule more feasible than other budgeting methods, as it allows you to treat yourself within the confines of a set limit, which also forces you to prioritise your wants. In contrast, while penny-pinching and living a Scrooge-esque life might reduce your expenses at first, it’s unpleasant enough to deter anyone from committing to such a lifestyle in the long run.
How to allocate your money using the 50-30-20 rule?
Although the 50-30-20 rule is quite simple, it’s imperative to know what category each expense constitutes as in order to make the best use of this.
The first thing to do when you get the month’s income into your hand (if you earn a fixed income each month), is to immediately put the 20% into your savings account, and ensure that you don’t touch it thereafter. While most savings tips encourage separating your savings right from the get go, the 50-30-20 rule assigns a specific amount.
Once you have set aside your savings, the next thing to do is to immediately allocate 50% towards your fixed costs for the month which would include everything you cannot live without i.e. your needs. This would consist of all your utility bills, rent, loan repayments, insurance etc. If you find that you cannot manage all your needs with 50% of your income, then you need to seriously evaluate your lifestyle choices and look at switching to cheaper options. Prioritisation of one’s wants over one’s needs is usually what drives people into needing to borrow money from places like OnCredit.lk to pay these needs off.
Everything else that makes you happy should be managed with 30% of your income. Plan what you do with this money wisely and plan ahead for any dinner outings, birthdays or special events that you would need to allocate cash for. With a little bit of restraint over a few months, you can collect up this amount and even treat yourself to an extravagant purchase later on.
There are many tools available nowadays that are built for budgeting, advocating various principles of budgeting and recommending various savings tips. However, a closer look will show that most of these methods are built upon the 50-30-20 principle, where you set aside money for savings first, then your needs and the remainder for your wants. Of course, this method might not be suitable for everyone and you might find that tweaking it slightly to contribute a bit more to your needs and your wants, and less for savings are more practical for your lifestyle. You could also read more on Financial Tips for Young Adults to get a better grip of your finances. There is no one-size-fits-all approach to budgeting and there might even be a few months where you are unable to save any money at all. Regardless, millions of people around the world swear by the 50-30-20 rule of budgeting and it is definitely a great place to start from.