Trying to budget your income can be tricky but luckily, there are tons of different budgeting methods and techniques you can use to try and save as much as possible.
However, due to the sheer amount of different rules and methods, a lot of people struggle to find the right one that suits their income and situation.
Here, we are going to be taking a look at the 50/20/30 rule. It’s a pretty popular rule people follow but what is it and how does it work ?
Let’s find out!
What Is The 50/20/30 Budget Rule?
The 50/20/30 budget rule is a method people use to break up their income so they know how much to spend and how much to save (can you save enough to become a millionaire? Find out here). It’s a pretty popular rule that most people follow even though no one is sure where the rule started.
Some claimed that it originated with US senator Elizabeth Warren who wrote a book in 2005 called All Your Worth: The Ultimate Lifetime Money Plan.
This book introduced a lot of new budgeting techniques that people could use to stretch their finances further. In the same book, the 50/20/30 rule was introduced – but some people also credit the US business investor Warren Buffett.
Buffet is known for his general advice towards middle class Americans who are seeking to improve their finances.
The budgeting rule most commonly linked to him is the 70/30 rule, which some people suspect the 50/20/30 rule originated from but shifted to suit different incomes.
Basically, the 50/20/30 is not a guaranteed fix-it for all incomes due to how it works. But, for those with lower expenses, this is a great way to split up your money to ensure that you save just as well as you spend (for an alternative savings rule, check out our guide to the 70/30 rule).
So, how does the 50/20/30 rule work?
How The 50/20/30 Rule Works With Your Income
To try out the 50/20/30 rule, you need to take your monthly income and split it into three groups. Once you receive your pay post tax, the budget works by splitting your pay into 50%, 20% and 30%.
So, for example, if you are left with $1500 after tax every month, you will be left with three groups of money containing $750, $450, and $350.
According to the rule, the 50% group is to be spent on your needs. This involves mortgage payments, bills, food, transportation, etc. Basically, half of your monthly income needs to go towards surviving and living – the things you have to pay no matter what.
The 30% group will go towards your wants. This means things that you want to do for fun and enjoyment. For example, tickets to see a show or sports game, trips, shopping, recreational activities, etc.
This is to ensure that you get to do the things you love and live a happy life. After all, even if you are saving up for something, you still need to be able to live a fulfilled life and enjoy things.
The final 20% group is paid towards any debts you may have (such as student debts) or pair towards your savings. Some people may want to put this amount into a retirement fund while others choose to invest.
So, by dividing up your income, this rule allows everyone to split their money sensibly – but it’s not perfect.
The Limits Of The 50/20/30 Rule
One critique of the 50/20/30 rule is its optimism and its unrealistic expectations. After all, this rule was made way back in 2005 at the latest and since then, the cost of everyday living has increased substantially while salaries have remained the same.
This means that for many people, 50% of their monthly income is not enough to cover the cost of living.
Of course, you don’t have to follow the 50/20/30 rule. Some people only stick to the 20/30 rule once they have paid all their needs.
Once all of their bills have been paid for the month, they split the remaining amount into a 30% to 20% split and follow the rest of the rule that way.
Other people prefer Buffett’s 70/30 rule where 70% of your income is spent on needs and the remaining 30% is split again into a 20% to 10% ratio.
The 20% goes towards wants or retirement savings, and the final 10% is invested or given away philanthropically – but for average Americans, they don’t have 10% to just give away to charity.
Should You Follow The 50/20/30 Rule?
If you are struggling with overspending, then the 50/20/30 rule can help you out. It gives you a clear guideline to how much you can spend on yourself while knowing how much you should save and spend on living.
However, this rule may not fit everybody’s incomes – and that’s okay! You can just try another budget plan as there are plenty to choose from
The 50/20/20 plan is a popular one because it allows people to save and live while still permitting them to enjoy living without making them feel guilty.
It’s not uncommon to read articles that blame young people for being unable to save for a house deposit because they ‘bought a Starbucks once’ or ‘have a Netflix subscription’.
The 50/20/30 rule allows you to still enjoy the good things in life like subscriptions and treats while helping you save towards the next milestone in your life.
You shouldn’t be forced to give up everything you love. However, some people don’t mind saving more and spending less on themselves.
Whether or not this budget rule is the right one for you all comes down to your personal preference.
Try it out and if you find that it is not a realistic budget for you – whether because you want to save more or need to spend more on expenses – then you can simply try another strategy.
Good luck!