What is the 50/30/20 Rule of Budgeting?

Remember the last time you fell short on cash by the time you reached the end of the month? And has this been a monthly ritual for you? Money woes can hit you any moment of the month if you don’t effectively manage your money. And if your bank account reflects NIL in just the second week of the month, high chances are that you are unaware of the importance of budgeting!

We are living in a world where whipping out our credit cards and using “pay later” apps can make us form the unhealthy habit of instantly gratifying our never-ending needs. But what we are not understanding is that more than these credit products, we need to learn how to manage our money better. Whether you are a young and ambitious professional who is trying their best to survive in the big city or a well-settled individual who still cannot identify the importance of saving, the truth remains that money management issues can lead to greater challenges like increased debt and stress to repay them.

If you find it hard to allocate a proper budget every month in order to keep your finances on track, you need to learn the 50/30/20 rule of budgeting.

What is the 50/30/20 Budget Rule?

Simply put, the 50/30/20 budget rule makes it easy to create a structured financial planning for managing your money effectively and sustainably. The basic rule is to break your in-hand salary into three parts: 50% for needs, 30% for wants and 20% for savings/investment. This divides your monthly requirements and categorises each bucket you would ideally need to spend.

Decoding the 50/30/20 Rule of Budgeting

Here’s how the 50/30/20 rule of thumb is broken down into three proportions:

  1. Needs: 50%

    Needs include the components one cannot live without, something you absolutely need to do every month for survival. They include:

    • Groceries

    • Rent

    • Utility bills like electricity, gas, water, mobile, etc.

  2. Wants: 30%

    These include the things you want but you can survive if you don’t have them. They include:

    • Vacations

    • Pursuing hobbies

    • Dining out

    • Seasonal shopping

    • Movies

    • Streaming services

  3. Savings: 20%

    Savings is the most crucial part of a budgeting rule. While the needs and wants are important to fulfil in the present, savings will help you achieve your future financial goals. Although this budgeting rule allocates only 20% to savings, it must be your utmost priority and should never be ignored.

How to Apply the 50/30/20 Rule?

The cash crunch at the end of the month, or sometimes even in the middle of the month, is due to inadequate knowledge of budgeting. The 50/30/20 budget rule will help you become aware of your financial spending, limit overspending and develop the habit of saving. Here’s how the 50/30/20 rule of budgeting works:

  1. Calculate Your Monthly Income

    Calculate the after-tax income you receive in your bank account. If your workplace has a retirement account, learn the amount withheld and what is added to your take-home salary. If you are a freelancer or a business owner, set aside the business expenses and add whatever you earn in a month.

  2. Categorise Your Spending History

    To understand how to divide your needs, wants and savings, you need to categorise where your money goes every month. Take your bank statement for the past month and sort the transactions in each category.

  3. Evaluate and Adjust Your Spending

    Once you know where your money goes, you can easily adjust your spending to match the 50/30/20 rule of thumb. And if you feel like you are not saving enough, try to cut down on your wants.

Can the 50/30/20 Rule Apply to Everyone?

Not everything works out the same for everyone, especially in money matters. When you think of applying the 50/30/20 rule, it is possible to not work for you because everyone has different financial situations, needs and goals. Here’s what can happen:

  1. Grey areas while categorising

    Sometimes, the categorising can fall on a grey scale as it can become hard to sort out your wants, needs and goals. For example, although groceries are a need, unhealthy snacks and drinks are not. So, allocating 50% of your income to needs may not be required here.

  2. Low-income people may find saving difficult

    People with a low income, who have a hard time satisfying their basic needs, will naturally find it difficult to save even 20% from their salaries.

  3. 20% saving might not be enough for bigger goals

    If you have bigger financial goals like buying a property or retiring early, the 20% saving part will not work for you as it will take longer to satisfy your goals. Instead, you can open a savings account with a high-interest rate to reach there!

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50/30/20 Budget Rule vs Other Budgeting Rules

While here we have given you an in-depth insight into the most commonly followed 50/30/20 budgeting rule, it is not the only method you can follow. There are other players in town, such as:

  • 80/20 Rule: Here, you save 20% of your income and set aside 80% of it to spend on whatever you want to, no categorisation required.

  • 70/20/10 Rule: Similar to the 50/30/20 budgeting rule, the categorisation goes like 70% for needs, 20% for wants and 10% for savings.