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Are you looking for a new way to budget? The 50/30/20 rule may be for you. It’s one very easy way to budget that can work for many people.
A great way to spend too much money and end up in debt is not budgeting. If you don’t know where your money is going it will be hard to scale back when needed and you won’t know how much money you actually have for extras.
One easy method for budgeting is the 50/30/20 budget. It takes the guesswork out of budgeting and makes it easy to understand and use.
What is the 50/30/20 rule?
First made popular by US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi in their book, All Your Worth: The Ultimate Lifetime Money Plan, the 50/30/20 rule is one of the best ways to plan a budget. Those who attend financial planning courses or contemplate bankruptcy or credit counseling will find the rule extremely helpful.
The 50/30/20 rule clarifies how much you must earn to achieve your goals. The plan also clearly defines your spendable cash and your needs, which are must-knows when you’re facing financial hardship. Nowadays, this budget rule not only is intended for household use, but it can also set business income goals.
The 50/30/20 rule works like this:
- Keep 50% of your income for needs. Housing, groceries, utilities, transportation, insurance, and healthcare are some of the things we need.
- Spend 30% of your income on wants. Your wants are the fun things to do, such as entertainment, shopping, dining out, gifts, and hobbies. To spend thirty percent of your income, tell yourself that the rest has been budgeted for.
- Invest 20% of your income and take on debt. Finally, you apply your remaining 20 percent to meet your financial goals, such as saving for retirement and long-term dreams. You also should use a significant portion, if not all, of that 20 percent to pay off consumer debt.
A budget prepared like this will let you automate the process and reuse the same budget plan.
Creating Your Own 50/30/20 Budget
Creating a 50/30/20 budget is easy. You can use a simple spread sheet or the budget planner of your choice. Whatever type of budgeting works best for you.
Here is an example of the 50/30/20 budget rule for your reference:
Another great tool that can help you set up your 50/30/20 budget is the 50/30/20 rule calculator from Nerdwallet.
The 50/30/20 rule will quickly become your favorite way to budget without having to stress trying to figure out how much you can spend on different things.
This method is simple to use and takes a lot of the guess work out of budgeting. However, this method has some drawbacks. One of the main disadvantages is that more than half of the population in the U.S. earns too little money to take advantage of these plans.
Those who can, however, will benefit significantly from sticking to this financial plan. And you can also use this to see how much money you’d like to earn. It can help you decide if you want to change jobs or maybe start a side hustle.
Overall, it’s a great method to learn and save for when you are able to use it.