Design a personal budget following the 50/30/20 rule It can become your ace in the hole when it comes to saving, especially if you don’t have the time -and the determination- to keep track of each one of your expenses or to separate each operation into different categories.
But what is the 50/30/20 rule and why is it effective? Mainly, it is about divide your monthly budget into three large groups: needs, wants and savings or debts. By managing only three labels, you will reduce the time you spend on the itemized record of expenses and, at the same time, you will be able to see your financial picture in a photograph.
To set a dollar amount for each of these three categories, you will only need one piece of information: what are your net income, that is, the monthly money you get after deducting taxes. To obtain this figure quickly and easily, all you have to do is look for the check or payment receipt and deduct the ordinary deductions, such as the payment of the healthcare or contributions to the retirement fund.
Divide the remaining amount into three: 50% to cover your basic needs, 30% for fun, entertainment or desired purchases and the remaining 20% to pay off your debts or -better yet- for savings.
How to manage your budget following the 50/30/20 rule
As we explained earlier, the first thing you need to do to start saving with the 50/30/20 rule is to figure out how much money to allocate to each category: needs, wants or entertainment and savings or debt. Let’s say your calculated after-tax income was $6,000 per month. In this case, you would have $3,000 to pay for your necessities, $1,800 for expendable expenses, and $1,200 to save or pay off debt, such as credit cards or a personal loan.
Now that you have divided your income based on the budget, let’s see What are the expenses included in each category?:
Necessities or necessary expenses
Necessities are those expenses that you cannot ignore, that is, the ones you must pay off at the end of the month no matter what happens. Example of expenses and essential goods are:
- Public services
- housing or rent
- Clothing and food
- Medical care or health insurance
- Minimum payment of credit cards
In this kind of label we could also include the mortgage installment payment or of vehicle insurance, since -if you do not cancel them on time- you could face the application of charges for late payment or -in the worst case- the embargo.
wishes or entertainment
This category refers to those things you choose to spend your money on, but that are not necessarily essential. Let’s look at some examples:
- go to a disco
- Buy presents
- have a few drinks
- Order food at home
- Go out to dinner with friends
- Shop at a coffee shop
- change mobile phone
- Watch a movie in the cinema
- Memberships and subscriptions
Here you can also include other luxuries and superfluous expenses, such as a plan premium to enjoy special television channels or a phone plan with more megabytes than you need.
TIP: Sometimes it’s hard to separate wants from needs. In fact, most people have trouble telling the difference between the two categories. A simple way to do this is to ask yourself if you could live without that expense or service. If the answer is yes, then you are facing a desire and not a need.
savings or debt
This is perhaps one of the easiest categories to fill in because it is about the money that you collect month after month to meet future expenses or to pay your debts quickly and without complications.
The good thing about having a special category for savings – instead of waiting to see if there is any dollar left at the end of the month – is that you can use 20% of your income to open a savings account, have an emergency fund, collect the initial of an apartment, invest in your retirement or study a new career.
If you want to use it to pay off debts, you can free yourself from credit card interest, completely cancel your student loan or pay an amount higher than the mortgage with this amount.
How successful is the 50/30/20 savings method?
To implement it well, very much! The 50/30/20 rule has proven to be extremely helpful and easy to follow for many people. However, its effectiveness will depend on your personal circumstances and needs.
There is no denying that separating expenses into just three categories is perfect for those who are starting to save, that is, for starters. Dividing your budget into three will help you easily categorize each expense and follow the plan to the letter.
But if you are not a beginner and have been working with budgets for some time, you may not consider the 50/30/20 rule as accurate as you would like. In this case, you can always find a financial plan or method that best suits you.
Another disadvantage that we can bring up is in terms of the breakdown of expenses. For example, depending on your income -and the county in which you live- set aside 50% for the payment of necessities it could be too much or, on the contrary, not enough. After all, a rental in New York is much more expensive than one in Charleston.
Finally, if your income is very high, the 50/30/20 rule may not work for you, since you would have to spend a large sum of money on superfluous things or set aside too little for savings.
So is the 50/30/20 rule for saving the right one for you?
If you don’t like working with detailed budgets or complicated mobile apps, the 50/30/20 rule might be the best solution. Remember that you only have to take into account three essential categories. This way, you won’t waste time -or stress yourself- having to fill in complicated tables.
However -and before choosing it as a savings method- you must take into account its disadvantages. The 50/30/20 rule doesn’t work for everyone., especially if you live in an area where the cost of living is too high or if you are paid above average.
This doesn’t necessarily mean you can’t use it: you may have to adjust the percentages to your particular needs to customize it to suit you.
If despite this you think that the 50/30/20 rule to save is not for you, don’t worry! out there are many savings models and budgets that you can still try to get the most out of your finances.