Making money is great, but knowing what to do with it is what truly separates the financially successful from those who struggle. The 50-30-20 rule has been tried and true for quite some time. Those who need extra help knowing what to do with money have found that this rule has made a major difference in financial health. What is this rule? Could it be a good fit for you? We have all the answers you need to get started and begin managing your money effectively.
What Is the 50-30-20 Budget Rule?
The 50-30-20 budget is a way to split up your after-tax income to manage your money wisely and effectively. When you finish paying the taxes on your paycheck, 50% will go toward your needs, 30% will go toward your wants, and 20% will go toward your savings account.
How to Set Up Your 50-30-20 Budget
Setting up the 50-30-20 rule for budgeting is not all that difficult to do. If you have a job where you make the same amount of money each week, this process will become even easier. Let’s look at how you will need to break things down to ensure that you are splitting your money correctly.
Start With Essentials (50% of Your Income)
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With the 50-30-20 strategy, 50% of your income will go to your necessary expenses. These expenses are fixed costs like your rent or mortgage, utility bills like sewage and electricity, health insurance, food, water, and child care—the costs that you need to pay each month to keep yourself clean, sheltered, and employed.
In an ideal world, your needs should not require more than 50% of your post-tax income. If you find that 50% will not cover your needs due to the high cost of living, then you might need to find ways to cut costs or increase your income.
Can you consider refinancing your mortgage loan or renting a smaller apartment? Can you sell your car in exchange for a used one or use public transportation instead? Can you start using discount stores and coupons to save on groceries? Are you due for a raise or a salary increase? Is there any way you can make some extra cash every month?
These are just some of the ways you can get your fixed costs closer to a manageable percentage. Your necessary payments are a little bit harder to negotiate because these fixed costs greatly affect your quality of life.
Budget for Your Wants (30% of Your Income)
The next largest part of the 50-30-20 rule is dedicated to your personal enjoyment. If you’re working exclusively to pay for necessary expenses, it doesn’t give you much room to enjoy life. Income is a means to enjoy life, not just survive it. Budgeting roughly 30% of your income toward your “wants” is a great way to start.
Your “wants” budget can go toward a vacation fund, clothing, movie theater tickets, concerts, and other entertainment, toys for your kids, miscellaneous shopping, the occasional date night, etc. This spending category allows you to enjoy life.
Save What’s Left (20% of Your Income)
Ideally, you should devote the 20% left of your income to savings. This can be immediate savings, a 401k, ROTH IRA, or other long-term retirement savings accounts. The better you are at saving money, the easier it is going to be to retire someday.
Saving money at a consistent rate and starting at a young age is the best way to guarantee that you will one day have enough funds in your savings account to retire. Even if 20% doesn’t feel like it’s all that much money, this amount will add up over time. If you have debt payments, this is the category you should use to start your debt repayment.
If your debt doesn’t give you much room to save 20% of your income right now, start out slow. Start by saving 5% every week for a few months, then increase to 10%, then 15%, etc., until you’re able to save 20% of your income every month. When an emergency comes up, you’ll be glad you did! Savings are also essential to help you prevent future debt.
How To Start Budgeting
Now that you have a better idea as to what this 50-30-20 rule is, it’s time to start putting this system into place. There are a few ways to get started, but these are some essential tips that you can follow.
Run the numbers.
When it comes to budgeting, you should know the total amount of money you make, when your salary is paid (weekly, biweekly, or bimonthly), and what your payments and responsibilities look like throughout a month. If your employer offers early wage access (through the Rain app), setting up a budget can sometimes be a lot easier.
Early wage access makes your money available almost immediately after you make it. This is an excellent option for starting to allocate your funds to the necessary sources as soon as they come in. When you have to wait two weeks or longer for payday, it can be a lot harder to visualize what you’re making and understand where it all goes!
Set realistic goals.
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Aside from the 50-30-20 rule, you should set goals for retirement, savings, and even some of your wants. If you plan to buy a new car or take a vacation, write that down and start considering how this will fit into your budget.
Setting goals doesn’t need to be complicated. P; pick a few simple wants and work to achieve them. Establishing clear and realistic goals will help you stay on track with your finances.
Check your progress.
Setting up your budget is easy, but falling off track is even easier. Check on your budget's progress each month. See if you were able to stick to the 50-30-20 strategy, and if you were not, consider what adjustments you can make in the following months. Try to be strict with yourself when it comes to budgeting; cheating will only hurt you in the long run.
Is The 50-30-20 Rule Worth Trying?
There are plenty of different types of budgets out there to choose from. At Rain, we like the concept of the 50-30-20 strategy because it is simple enough to start today. If you are interested in making sure your money is appropriately allocated when it is spent, the 50-30-20 rule is a perfect place to start. It is not always easy to know what is right and wrong when it comes to personal finances. This budget gives people direction and a clear rule of thumb to move forward toward financial success. Good luck!
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