You must be wondering about budgeting 50 20 30. Well, honestly, it is the rule for people who do not want to micro-manage their finances. It, to some extent, is a budgeting rule for lazy guys like me.
I believe that budgeting should be easy, it shouldn’t consume a lot of time and if it requires crunching numbers for hours then it is not for me.
50 20 30 rule is a simple way to budget, and it helps you to achieve your personal finance goals if you stick to it. In this article, I will discuss everything you need to know about budgeting 50 30 20, why it fails sometimes, and what are the alternatives to this budgeting method.
What is Budgeting 50 20 30?
We all know that budgeting is important and we should be doing it, but we don’t, Why? because budgeting is considered a task that requires you to be an expert in finance.
Also, people believe that it requires a lot of data entry every day, writing down where the money is going, remembering every little spending, and to some extent that’s true.
That’s where the budgeting 50 20 30 rule comes in. It is simple and you don’t have to be an expert.
50 30 20 rule is a money management technique that simplifies budgeting, with this technique you can divide your income into three major categories. 50% of your paycheck goes for the expense that is essential, 20% of the income will be saved and 30% goes for other wants and needs.
This is how you will categorize your 50 20 30 budget sheet
1- Essentials: 50% of your income will be used for essentials like Rent, mortgages, gas, groceries, etc.
2- Savings: 20% of your income will be saved
3- Other Expenses: 30% of your income will be used for other purposes like gym, restaurants, clothing, fun activities, etc.
What is the origin of “Budgeting 50 20 30”?
This money management technique might seem very simple, yet it is backed by research over 20 years by Elizabeth Warren and her daughter, Amelia Warren Tyagi.
Elizabeth Warren is a US senator and also the author of “All Your Worth- The Ultimate Lifetime Money Plan”.
She claims that money management should be simple enough so that everyone can do it, She says that budgeting shouldn’t be complicated, and if you want to achieve your money goals, you only have to divide your income over your essentials, saving, and wants using the budgeting 50 20 30 rule.
How to Use 50 30 20 Rule?
This rule simplifies your budget, your income is simply divided into 3 major portions. Knowing how much you have for each category makes it easier for you to spend and save.
Actually, the problem with us folks is that we know how to cover our expenses, we know how much we need to spend on our house and rent but we struggle when it comes to saving money.
Also, sometimes we overspend, which affects our overall financial situation. This is where the 50 20 30 rule comes in, when you know how much money you have for your essentials, you will not overspend.
It also bounds you to save a portion of your income, which otherwise will also be spent on extra and unnecessary things. Let’s understand how to use the budgeting 50 20 30 rule.
Use 50% on Essentials
You have got your paycheck today, excluding the taxes that you have to pay. Now take half of the total income that you have received and allocate it for your essentials. Some of the examples of essentials are given below
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Monthly rent
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Electricity and gas bills
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Transportation
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Insurances (for healthcare, car, or pets)
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Minimum loan repayments
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Basic groceries
- House fix
Let’s say you have $5000, now 50% of this money will go to your needs, allocating $2500 for your essentials will bound you to use no more than this amount. This will help you to stop overspending.
We do like to overspend, If have to renovate one room, I would not just stop there and before I know it, the whole house has been renovated. With budgeting 50 20 30, I know that I have limited funds so I would only do what is necessary.
This also helps us to see, if my income is lower than what I need, how can I reduce the cost, and cut down my essentials. For example, switching to another company with lower rates. Cutting down the usage of electricity so that I can fit my expenses within the allocated budget.
30% of your Income For Yourself
When we start budgeting we often forget ourselves, we forget that we too have wishes and wants. If you are earning money and you are not enjoying your life, that money is useless.
Most of the time budgeting fails when people forget their own wants and desires. They may follow their budget plans at the start but after some time, they will collapse as they have starved themselves of their own desires.
Budgeting 50 20 30 doesn’t do that. You will have a fixed portion of the money that you can spend on yourself. Do whatever you want for yourself. Reward yourself for properly managing money and saving for the future.
Following are some examples of wants:
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Dining out
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Clothes shopping
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Holidays
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Gym membership
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Entertainment subscriptions (Netflix, HBO, Amazon Prime)
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Groceries (other than the essentials)
You can add anything that you want to do with that money, go to the cinema or even throw a party. So as we supposed above, your income is $5000, then you can use $1500 per month on your personal needs.
Instead of starving yourself, go get that pizza, and enjoy the benefits of the 50 20 30 rule.
It’s not only about enjoying, budgeting 50 30 20 also helps you to cut down the extra expenses. If you are spending too much you will soon realize that you have spent all of the allocated money and now you will have to wait for the next paycheck.
This will help you to better regulate your expenses and cut down on unnecessary spending. Your spending habits will improve over time thanks to the 50 20 30 budgeting rule.
20% of the Income is Saved
We should all agree that it is hard to save money, whether you earn a lot or less, saving money is not a child’s play. However, with the budgeting 50 20 30 technique, you can save money every month for your secure future.
If you have not saved money, then you will have to take loans, and if you have a bad credit history, securing a loan with bad credit is not easy. You can argue that there are platforms that give loans with bad credit, but you will have to pay a much higher interest, so why not use the 50 30 20 budget and save money for any unexpected event.
You will also be using this money to pay off your debts faster. We know that loans are included in the “Essentials” category of 50 20 30 rule but, if you don’t pay your loans faster, like Student loans, your savings will have to cover the late fee and penalties, which, of course, is not pleasant.
So at first, we have to deal with the debt that we have to pay back. Savings will also contribute at this stage.
This is how you will save money with 50 20 30
20% of your total income after tax deduction will be saved, consider this your emergency fund, or retirement fund. So if you are earning $5000 a month, 20% of this amount will be set aside as savings, i.e $1000.
You can save this money in a savings account, or you can use the envelope method to keep it safe at home. That’s all up to you. With this budgeting technique, you know from the start how much money you have to spend and how much is there to be saved. This makes everything simple and easy.
Steps to Budgeting 50 20 30
If you have decided that this technique is suitable for you to budget your income, then let me walk you through the steps that you should take to start budgeting your income with 50 20 30.
Step 1- Calculate your income
This is the first step to starting your budgeting journey. If you are unaware of the total income that lands in your bank account you can not implement the budgeting 50 20 30 technique.
If you are self-employed, let’s say you have a small business, then at the end of the month, you should calculate the total income, then set aside your liabilities or business expenses, and also deduct the taxes that you have to pay.
If you are getting a paycheck, it is much simpler. All you need is to check how much money you receive in your bank account. As most probably your taxes are deducted by the employer already. If your employer is paying for your health insurance, add it back to the amount that you have received.
Step 2- Organise your spending
This is the tougher part of budgeting 50 20 30 method. You will have to gather all of the information about your spending for the last month. Because if you don’t know where have you spent your money, you can’t allocate the budget.
Take your bank statement for the last 30 days and then write down all of your expenses, under the 3 main categories of the Budgeting 50 20 30 rule. The categories are Essentials, Wants, and Savings.
Keep in mind that Essentials are the expenses that are a must and you can’t survive without them such as rent. “Wants” are the things that are important but you can live without them, and should not be prioritized over essentials.
“Savings” include the money that you will be putting aside for our future.
Step 3- Set up your personal 50 20 30 Budget
Now that you have assessed your income and spending, all you need to do is allocate the budget to your essentials, wants, and savings. You can add subcategories under each main category to be very precise about your budget.
You might not be able properly to follow it the first month as you will be adjusting your habits according to the budget 50 30 20 but after a month or two, you will be fine.
Keep in mind that “Wants” is a category that gives you flexibility, it is not a necessity and gives you leverage at the start of your budgeting 50 20 30. You can cut back on your “Wants” if you need some money for the essentials at the start.
Budgeting 50 20 30 Calculator
It is not that hard to calculate the percentages for budgeting 50 20 30 but still, for your ease, I am adding a calculator that will help you split your income into three different categories by applying the 50 30 20 rule.
Download 50 20 30 Spreadsheet
If you are serious about reaching your financial goals, you must start serious budgeting. It is difficult to create your own personal sheets on excel or google sheets, but it is necessary to keep track of your expenses.
I have created a comprehensive 50 30 20 rule spreadsheet for you so that you have no reason not to budget. You can freely download this spreadsheet, and share it with your friends and family.
This spreadsheet is based on the 50 20 30 rule, it includes major categories and I have also added subcategories for your ease, you can add anything in the spreadsheet and the money will be divided according to the 50 20 30 budget rule.
Is 50 30 20 Good For Everyone?
Budgeting 50 30 20 might sound easy and workable, and it is easy and workable for many. If you don’t want to spend hours in the spreadsheets and tracking every little thing, then this technique is the best.
It is simple and effective.
However, One size doesn’t fit all.
For people who want to micro-manage their personal finance, and structure, this method is not for them. It will not give every detail and aspect of their financial activities.
Another problem with 50 20 30 is the breakdown of money into essentials, wants, and savings. These fixed percentages might not work for everyone, depending on your income and the area where you live, 50% may not be enough for you to cover all expenses.
But the good thing about the 50 30 20 rule budget is that it is flexible and you can change the percentages of spending and savings after a careful analysis of your finances.
Some people also criticize the budgeting 50 30 20 rule that it is not fit for people who earn a lot of money because their wants are also much higher, they would like to spend more, buy expensive things and for this 30% of the income might not be enough.
A Slight Variation of 50 20 30 Rule
Now that we have seen some limitations, Let me suggest you another variation of the 50 30 20 rule, this variation might suit people with low income, people living in expensive areas, and the Rich.
80 20 Budgeting Rule
A much simpler way to budget your income. You can put 20% of your income aside as your savings and the 80% is all yours, you have to manage everything in that 80%.
Whether it is the bills, the rent, mortgage, or loans, you will have to use the 80% for this purpose. You will also spend from this 80% on your personal needs.
The good thing about this variation is that you are saving nevertheless, and you have a big portion for everything else.
How to Use 50 20 30 Rule to Your Advantage
As I said it might not be the budgeting rule for everyone, but you can use it to your advantage. It will give you an opportunity to at least start budgeting. With this simple rule of 50 30 20, you will start to understand where is your money actually going.
You will know where are you overspending and how to control that. Once you have developed a habit of budgeting and saving money, I am sure you will move towards a more comprehensive budgeting method.
There are some alternatives to the Budgeting 50 20 30 rule.
Let’s talk about them…
Alternatives Budgeting Methods
Budgeting 50 20 30 is not the only budgeting method, it is easy and it is like a raw form of budgeting, but in this age of information technology, there are many other ways of easy budgeting.
One of which is using mobile budgeting apps. This might seem complicated but it is not.
Trust me,
Most of us are moving into a cashless society, and most over transactions are now online, we pay our bills, loans, subscriptions, and our meals at a restaurant through the mobile device. We are using payment apps like PayPal, Cash App, Zelle, and Netspend, this makes it difficult to track our minor expenses.
Manual budgeting is a difficult task. Let’s have a look at how can you use mobile apps if you don’t want to use the 50 20 30 budget method.
Mobile Budgeting Apps
Mobile apps have literally revolutionized budgeting, these apps are simple to use, they have easy-to-understand reports and they cover aspects of budgeting.
All you have to do is connect a budgeting app with your bank account, and it will automatically, create categories by analyzing your spending habits, you will see categories such as loans, utilities, subscriptions, etc.
These budgeting apps will also help you to save money, some apps have features that will not even save your money but also invest it automatically without you even noticing, these apps will use leftover pennies round them off to a dollar and invest it in your behalf, and before you notice you will have a portfolio that is generating wealth.
These apps will also help you cancel subscriptions that you don’t know exist.
Some of the Best Budgeting Apps are:
- Mint
- AndroMoney
- GoodBudget
- Monefy
- Money Manager
These are the alternative methods that you can use instead of Budgeting 50 20 30 to save money and reach your financial goals.
Verdict
Budgeting with 50 20 30 is a great way to start moving towards a better financial future, it may not be for everyone but it is could be a starting point for everyone.
We are all trying to move toward a healthy financial position in our life. I hope this article was helpful for you, Share your thoughts in the comment section below.
Cheers…