What is the 50/20/30 Budget Rule? Plus, How to Make it Work For You
When you hear the word budget I'll bet your eyes glaze over, I know mine do. That's probably why only about one-third of Americans maintain a household budget1. Budgeting is not a fun or entertaining topic but it is the foundation of a successful financial life.
Very few people have the willingness to document every single expense over the course of an entire month. Creating a comprehensive family budget may sound overwhelming and unachievable; so there has to be a better way, right?
A simple solution is something called the 50/20/30 budget rule. A fairly simple formula, this rule provides you with some structure to your spending and saving, making it easier to get a clear picture of how much money is going out each month, as well as where it is going.
The 50/20/30 Rule: How It Works
The 50/20/30 budget rule is often referred to because it’s quite simple to follow.
According to the rule:
50: Half of your income (50 percent) should be allocated for living expenses and essentials, such as rent and groceries.
20: Twenty percent of your income should go to savings, investments and any debt you owe.
30: Thirty percent of your income should go towards everything you want, but don’t necessarily need.
An important note: the essential and flexible spending percentages are the maximum; you always want to try to go below the recommended percent if you can, the easiest way to do that is to keep your big-ticket items in check (housing, transportation).
Implementing the 50/20/30 Budget Rule
Now that you know what the 50/20/30 budget rule is, it’s time to execute it. Take a look at your pay stubs to determine the exact amount of money you make every month. This amount will then be used as the foundation for your budget. If you’re self-employed, be sure to be extremely detail-oriented when it comes to tracking your income versus your expenses, and don't forget about putting aside a portion of revenue for taxes.
Once you know your income, it’s time to track expenses. This is easier said than done (we provide spending tracking and classification on our client portal to help with this). Your monthly fixed expenses are easy enough to track but don't forget about fixed expenses that only occur once or twice a year (taxes, insurance). Once you know your fixed expenses and your income the rest will take care of its self. If your fixed expenses are under 50 percent, save 20 percent then go ahead and enjoy the rest. Don't worry about tracking spending on the remaining 30 percent (things you want) because you have already taken care of the important parts of your financial life.
1 https://news.gallup.com/poll/162872/one-three-americans-prepare-detailed-household-budget.aspx