Budget, Save Money, and Pay Off Debt with The 50/30/20 Rule

The 50/30/20 budget is one of the many rules of thumb in personal finance. This simple budgeting technique is great if you are new to budgeting and are looking for answers to questions like: “how to save money when you are broke?” or “how much of your salary should go towards paying off debt, savings, and investments?”

The 50/30/20 Budget Rule: What Is It?

The 50/30/20 rule is a simple yet effective budgeting strategy that divides after-tax income into three primary categories:

1. Needs (50%): This group includes necessary costs that are unavoidable in order to preserve a stable and secure living environment. These consist of the very minimum debt payments as well as housing, utilities, groceries, insurance, and transportation. Setting aside 50% for needs guarantees that people prioritize their basic needs and have comfortable lives.

2. Wants (30%): Spending that is not necessary for survival but improves one's lifestyle falls into this category. It covers entertainment, travel, dining out, pastimes, and other non-essential expenses. While 30% is designated for personal enjoyment, people should use caution to prevent overspending and preserve their financial stability.

3. Savings and Debt Repayment (20%): The goal of this category is to accumulate and safeguard funds for a secure future. It includes paying off debt above and beyond the minimum requirements as well as contributions to retirement, emergency, and savings accounts. A person can build a safety net and work toward long-term financial objectives, like reaching personal financial milestones or building wealth for retirement, by setting aside 20% of their income for savings.

50/30/20 Budget Example

Assuming your monthly paycheck is $4,000. Using the 50/30/30 rule, you should plan to spend:

Essentials (Needs): $2,000

Wants: $1,200

Debt and Savings: $800

Consider the percentages to be the maximums you can spend for needs and wants but the minimum for debt and savings.

For example, it is possible you could live a bit more frugally and not spend $1,200 on dining out, travel, cell phone bills, cable TV, and other non-essentials.

If you can cut your discretionary spending to $700 for the month (for example), the remaining $800 can be used to beef up your ‘needs’ budget, pay down debt faster, or ramp up your emergency fund savings.

Benefits of The 50/30/20 Rule

Clarity and Simplicity: The 50/30/20 rule provides a simple and easy-to-follow budgeting framework. Because of its simplicity, people can decide what their financial priorities are and make well-informed decisions.

Financial Discipline: The 50/30/20 rule encourages financial discipline by assigning set percentages to various categories. It stops people from making rash purchases and motivates them to give their financial objectives top priority.

Emergency Readiness: The twenty percent set aside for savings acts as a safety net, giving people the ability to handle unforeseen costs and crises without taking on debt with high interest rates.

Attainment of Long-Term Goals: The 50/30/20 rule's focus on debt repayment and savings makes sure that people consistently move closer to their long-term financial objectives, like retirement, education, or homeownership.

Adaptability: Although the rule offers a broad framework, specific situations can be accommodated. Individuals can modify the percentages according to their distinct financial circumstances, enabling adaptability while preserving the general framework.

Is the 50/30/20 Budget Rule for you?

A straightforward and efficient method for managing your finances and achieving your financial objectives is to follow the 50/30/20 budget rule. It is not a one-size-fits-all solution, though. The 50/30/20 ratio might not be suitable for some people.

Before determining whether the 50/30/20 budget rule is appropriate for you, take into account the following factors:

Your income: You might be able to devote more than 30% of your income to wants if you have a high income. On the other hand, you might have to devote more than 50% to necessities if your income is low.

Your expenses: You might need to devote more than 50% of your budget to needs if you have a lot of fixed costs, like housing and transportation. On the other hand, you might be able to devote less than 30% of your income to wants if you have a lot of discretionary spending, like eating out and entertainment.

Your financial objectives: You might need to set aside more money than 20% for savings if you're saving for retirement or a down payment on a home. Conversely, you might be able to set aside less than 20% for savings if you are not saving for any particular purpose.

Alternatives to the 50/30/20 budget rule

1. 30/30/30/10 Budget Rule: This rule states that you should spend 30% of your take-home income on housing; 30% on utilities, groceries, and childcare; 30% on savings and debt repayment; and 10% on entertainment and other desires. By putting housing under its own category, this budgeting strategy helps you better focus on keeping housing costs under 30% of your income.

2. The 30.10/60 Rule states that 60% of your income should go toward debt repayment and savings, 10% should go toward wants, and 30% should go toward needs. This budget is designed for the person who wants to pay off debt as soon as possible and save money for retirement.

3. The zero-based budget: This budget requires you to account for every dollar you earn. It can be a lot of work, but it is a very effective way to track your spending and make sure you are not overspending.