This is one of my favorite rules when it comes to money. The reason that I like it so much is because it works no matter how much your income is. The only exception is if you spend literally your entire paycheck on expenses, in which case, you need to consider which, if all, of your expenses are 100% necessary, and whether some of them are just luxuries. So let’s dive into the 50/30/20 savings rule.
What is the 50/30/20 Rule?
Simply put, the 50/30/20 rule is a way of breaking down your income in a way that allows for you to pay for the things that you want and need, while still building up your savings safety net. By designating a certain percentage of your income to each aspect of your budget, you can manage it better and more confidently.
How Does the 50/30/20 Rule Work?
The basic idea behind the 50/30/20 Rule is that you break your income down into three categories. These three categories are the things you need, the things you want, and your savings, in that order. This helps to force you into saving money each month. Although your savings is the smallest percentage of the rule, 20% of your income adds up as the months go on. My favorite part about this rule is that it still allows for you to have money for activities that you enjoy, so you don’t feel like you have to sacrifice fun for saving.
The 50: Things You Need
The things you need are also called your expenses. These are things like your rent, your bills, car payment, and insurance. Basically it is anything that you have a monthly payment on, or that you need every week. This does not include any purchases that you make on a regular basis, such as pizza every Friday night, or your coffee before work every day. Those are not things that you need, they are things that you want. They fall under the second categories.
The 30: Things You Want
This is the fun section of the rule. This is the 30% that you get to use on the things you want. This could be eating out at your favorite restaurant, going to a movie, taking your family to the zoo. Basically this is the money each month that you use to enjoy yourself, and you can use it on literally anything you want, as long as you stay within the 30%.
The 20: Money You Save
This is the most important part of the rule, and it is honestly the entire point of the rules existence. Our goal is to build up and save as much money is possible, that way we can have a safety net for when times go bad. This also helps us to find vacations, put our kids through college, and helps to set us up for a comfortable retirement. This 20% of your income should go into your savings account and it should stay there. It should only be used in an extreme emergency, and no the new overly priced $1000 iPhone is not an extreme emergency!
How Strict is This Rule?
This rule is only as strict as you are. You have to actively put in an effort to follow it, or else it does not work. Another great thing about this rule, is that you can flex it. However you should only flex it if you need to, or in ways that help you save more. Maybe you are good at keeping your expenses down each month and you don’t need to use 50% towards your needs, feel free to add that extra percentage to your savings and save more each month. Or maybe times are really tough and you can’t afford to put the whole 20% into savings. You can do another percentage if you have to. Any amount of money that you are saving each month is a good step towards financial stability, but the goal should be to increase that amount as much as possible, as soon as you can.
Thanks for Reading!
I hope that I have done a decent job explaining this rule to you, and that you have a good understanding of how it works. This is an amazing way to manage your budget and I believe everyone should give it a try, and figure out how to make it work for them. If you enjoyed this post feel free to leave a like, and you can follow the blog to stay updated when I post more content. Thank you!