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No matter where you are on your financial journey, a budget is key to ensuring that you are set up for success. It can help you rebuild your savings after they’ve been depleted during a pandemic, or get rid of high-interest credit card debt.
There are many budget plans of varying levels of complexity, whether you’re budgeting for irregular income or following a spending plan that prioritizes savings.
But one method of budgeting, the 50/20/30 rule (sometimes also written as the 50/30/20 rule), can be a simple strategy if you need help starting a budget, or you’re back on track after a setback.
Read everything you need to know about the 50/20/30 budget and whether it’s right for you.
What is the 50/20/30 rule?
The 50/20/30 rule was covered comprehensively by former professor (now Senator) Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan.
The rule allocates money into three separate groups based on after-tax income (your salary you take home). Organizing your money in groups can be easier for people who get bogged down in more detailed budgeting methods.
Compulsory expenses represent 50% of your income. This includes mortgage or rent payments, utilities, health care, basic groceries, transportation, and childcare costs.
Savings and debt payments account for 20% of your income. This means 20% of your salary should go toward building an emergency fund, increasing retirement savings, or paying off credit card debt or student loans.
You want it to represent 30% of your income. This includes expenses such as cable, internet, and phone costs (although in a technology dependent society, they are arguably a mandatory expense). In general, this category represents the nonessential costs you can live without, such as eating out or going shopping for new clothes.
Its simplicity is one of the primary attractions of the 50/20/30 budget rule. Think of the person making $5,000 a month. Applying the 50/20/30 rule will give them a monthly budget of:
- 50% of mandatory expenses = $2,500
- 20% to save and pay off debt = $1,000
- 30% for wishes and discretionary spending = $1,500
How realistic are these percentages? It depends on the category. In our example, the essentials include:
- One-bedroom apartment rent: $1,670
- Renters Insurance Premium: $15
- Car payment and insurance: $570
- Grocery: $356
To determine the percentage, divide the total mandatory items by the total home-earned wages and then multiply by 100.
In this example, ($2,611 / $5,000) * 100 = 52.22% of wages spent on mandatory expenses. This exceeds the 50% goal, but only by a small amount.
After that, savings and debt repayment must be calculated. In our example, these include:
- Student loan repayment: $393
- Credit card or other debt payment: $300
- Savings: $200
This fits within the 20% ($1,000) target. However, some people with significant debt may exceed the 20% goal. Others may want to set aside more of their debt to pay it off faster.
Finally, the word “wanted” could include:
- Mobile phone bill: $100
- Streaming services (Disney+, Netflix, Spotify, etc.): $31)
- Internet services: $70
- Eating out: $400
- Shopping: $250
This fits right in with the 30% target ($1,500).
In addition to simplicity, a percentage-based budget such as 50/20/30 can be adjusted to meet individual situations.
Based on our example, this person could set aside some of the money they “want” to increase their savings or put extra money into student loans.
Where the 50/20/30 rule doesn’t work
Although the 50/20/30 rule may be a good rule for individuals, it may be unrealistic for those on low incomes or those who live in areas with a high cost of living.
Fifty thirty twenty, a project created by a graphic designer for the federal government, illustrates the difficulty of following the 50/20/30 rule on different incomes and different family sizes.
The website pulls median income data from the 2014 Census-run American Community Survey (and although a bit outdated, it serves for illustrative purposes) and estimates home-earned wages. ADP . Salary Calculator. and with Inflation is rising at record levelsFor selected families, some of the costs described in the project are likely to be higher.
The site provides one example of a single man living on $35,637 a year in Chicago. This individual gets $2,253 a month after taxes.
If he wanted to accurately follow 50/20/30, that would be nearly impossible because his housing, utilities, and healthcare costs would consume more than 50% of his household wage.
credit: Fifty thirty twenty
Another example is a couple in Boise, Idaho who have two children. This family earns $72,104 annually and takes in $4,482 per month after taxes.
With their needs consuming more than 71% of their household wage, this family is also unable to follow the 50/20/30 rule. For them, budget irregularities are health care costs ($719, according to Family Budget Calculator from the Economic Policy Institute (EPI)) and childcare costs ($887 according to the EPI calculator).
credit: Fifty thirty twenty
How to use the 50/20/30 rule to your advantage
This budgeting method is a good way to get a feel for making savings and paying debts a regular part of your budget.
However, following the bucket’s allotment percentages for exact amounts may not be realistic, depending on your income and how much the necessities cost.
This does not mean that this method of budgeting is not useful. Using bucket amounts as a starting point can help you determine where you’re overspending. You may realize that you spend more on subscriptions or dining out and use this information to make adjustments.
If you turn to the 50/20/30 rule as a way to budget, you can simplify it even further by tracking your spending on budget app And automate your savings. Mint, for example, connects to the user’s bank account and allows the user to create budgets and keep track of upcoming bills due.
After planning how much you expect to spend on necessities, savings/debts, and needs, keeping track of them in an app that’s right for you can help you better visualize your spending and savings.
To simplify savings, more checking account Allow users to set up recurring transactions on a specific date each month.
Most experts will tell you that budgets should be flexible to help them work and make sure they are followed. But regardless of whether you choose the 50/20/30 rule or another method of budgeting, one thing is certain: having an idea of your cash flow, and adjusting your spending based on your long-term goals, can set you up for financial success.