Looking for a practical money strategy involving your paycheck? Financial industry experts recommend following the 50/20/30 rule. According to the 50/20/30 rule, 50% goes to needs, 30% to wants, then put the remaining 20% into your savings. This rule’s based on dividing your after-tax income in ways which should help you cover your retirement expenses. And best of all, it encourages you to have some fun along the way!
The 50/20/30 rule allows you to skip complicated budgeting methods and hard-to-follow plans that leave you feeling deprived and unhappy. Amelia Warren Tyagi’s book, All Your Worth: The Ultimate Lifetime Money Plan, explains this particular budgeting approach she helped co-create.
This seemingly simple guideline is incredibly powerful, because it helps you see and then control exactly where your money’s going. Plus, it’s easy to follow without adding too much complexity into the equation. Complete honesty with yourself about how much you’re spending and where is the first step in handling your finances intelligently. This method also ensures your day-to-day spending aligns with your longer-term financial goals.
The 50/20/30 Rule: First, Define Your Needs
Let’s look at each specific section covered under the 50/20/30 rule. What, exactly, is a need under this plan? A need is any fixed expense you incur that doesn’t really change from month to month. Half your income should go toward paying for needs. Examples include:
- Housing costs (mortgage or rent)
- Food (groceries)
- Utilities (water, gas, electricity, Internet)
- Credit card minimum payments
- Student loan payments
- Transportation costs (car payments, insurance)
If your monthly after-tax income is $2500, then you should allocate $1250 to pay for needs. But if your needs exceed this recommended amount, look for places in your budget to make some adjustments. Here are some ideas that may help: Can you shop at a more affordable grocery store or try using coupons? Can you install a programmable thermostat to automatically turn your air conditioner down each day while you’re at work? Could you carpool on weekdays or use public transportation to reduce your car maintenance and gas costs?
The 50/20/30 Rule: Next, List Your Wants
The next section is much more fun. The 50/20/30 rule allots 30% of your after-tax income to wants — the nonessential things that make life interesting and pleasurable. Wants include things like:
- Restaurant meals
- Vacations and travel
- Entertainment (movies, concerts, skiing trips, plays)
- Gym memberships and spa treatments
The 50/20/30 Rule: Savings & Paying Down Debt
Finally, you should put the last 20% into your savings and/or pay down debt. This category includes:
- Emergency fund
- Retirement savings/401k or Roth IRA investments
- Extra principal payments that reduce your overall debt (mortgage, car loan, student loans
Why Does The 50/20/30 Rule Work?
One reason many people find this budget easier to follow is it doesn’t ask you to forgo things you enjoy. So go ahead, take that road trip you planned last month or enjoy your Friday-night tapas date with friends. By portioning out your income in a realistic and sustainable manner, you’ll accomplish meaningful financial goals while moving toward retirement. The 50/20/30 rule provides easy-to-remember benchmarks for saving and a clear path forward on debt elimination. Instead of feeling punished like you’re on some never-ending money diet, this rule gives you complete control over your choices.
When you’re in debt, it’s easy to feel like you must use every extra dollar to pay it off quickly. But for some people, that approach actually causes more problems than it solves. That’s because, without any cushion built into your monthly budget for wants, you’re more likely to abandon it in frustration. Even worse, you could actually increase your debt with unwise splurging on emotional shopping sprees. Instead, simply track your spending (and if you’re self-employed your average monthly income) and follow the 50/20/30 rule. This method will help you get where you want to go financially.
This budgeting rule is the financial equivalent of committing to 10,000 steps each day for your fitness plan. It’s healthy, it’s doable, and it leads to good results for your finances without too much stress.
