Hello? Finance advice is calling here! We heard you want to learn new tips on how to save more money efficiently, and yes, we thought we should contact you! Like most of us, you might shudder a bit when you hear the word “budget”, or maybe it sounds too boring or challenging to tackle now.
But here’s the thing: there’s a simple rule known as the “50-30-20 rule” that might prove to be extremely efficient. If you’re just looking to simplify your budgeting process, then this is the perfect choice for you.
By using the best budgeting practices, you get to plan out exactly how to use your money, and it can be done in a way perfectly suited to your specific lifestyle and situation.
There are only three steps you need to follow, which will further help you prioritize your monthly financial commitments. So let’s see what this rule is all about!
The 50-30-20 budget rule
Simply put, the 50-30-20 budget rule is made to divide your after-tax income into three distinct buckets, meaning:
- 50% to meet needs.
- 30% to wants.
- 20% to savings.
Who invented this rule?
Well, surprisingly or not, United States Senator Elizabeth Warren was the one to invent the 50-30-20 budget rule. In her book called “All Your Worth: The Ultimate Lifetime Money Plan“, Elizabeth Warren, alongside Amelia Warren Tyagi, described the next best way to budget!
And unsurprisingly, it has stuck, because, as it turns out, people love how easy it is to understand and follow this rule.
How this rule works
Now, I know what you’re thinking: Okay, it has stuck, fine, but how does it work and how will it impact my life and financial plans? There are a couple of good reasons why this could be a great thing for your finances.
It’s simple
First and foremost, the budget is quite simple, so if you’re not really the kind of person who likes to go into details or you’re just starting out, then this kind of budget rule is good for you.
It is 100% fail-safe and super easy to implement. I mean, you only have to focus on three buckets: needs, wants, and savings, and they are all pretty easy to figure out.
Every single dollar has its own purpose.
By following this simple budgeting rule, you can account for every single dollar. You can start off with your after-tax income, which, as you know, represents 100% of what you can work with, and then you make your way into all kinds of different spending groups from there.
Financial goals
Last but not least, the 50-30-20 rule could help you stay focused on your financial goals and save up more money for large expenses like a house or a car. As an alternative, it could also help you create a debt reduction strategy, especially if that’s one of your main goals.
Percentage of your budget
The 50-30-20 budget is divided into three separate parts. As you read before, 50% of the budget goes for needs, 30% for wants, and the rest of 20% goes to savings.
Also, remember that you can always use a 50-30-20 calculator or, better yet, a 50-30-20 budget template to create yours. Now, let’s get into the details.
Category 1: 50% needs
The 50% needs category is mostly meant for your monthly essentials. When I say essentials, it could include everything that you simply cannot live without.
For example, rent or mortgage payments, healthcare, groceries, car expenses, payments, debt payments, and utilities Here’s what you need to remember: when you’re budgeting for needs, you only have to include the necessities you need in order to survive.
This means we can’t include entertainment, takeout, and fine dining in this.
How can you save to stay within the 50% rule?
Well, you should be able to easily meet your needs with 50% of your monthly income after tax. If you’re spending any more than this, then it means you have to re-evaluate.
Also, you need to reconsider if you’re paying way too much for rent or if you’re spending more than you should on transportation. If you also spend a large amount of money on your weekday lunches, you probably need to cook more at home and reorganize your meals.
These are all great questions to ask yourself. The good news is that you can make immediate changes to your spending and also improve your budget with this useful 50-30-20 rule.
For example, you might want to consider moving to a more affordable home or even using public transportation to keep costs as low as possible. Moreover, you can use cold lunch ideas and make your food at home.
Category 2: 30% wants
Wants are, as you can imagine, all the nice things we want to have but don’t absolutely need. For these things, we allow 30% of our budget. They could be something fun, or they could add to your life in a positive way, and that’s perfectly alright.
We need to do things that make us feel good, and we shouldn’t restrain ourselves from doing them. The whole idea is to keep a detailed budgeting plan so your spending habits won’t get in the way of your bigger plans.
Naturally, there’s an endless list of wants, and as you can imagine, they wildly vary from one person to another, depending on lifestyle, hobbies, and likes.
For instance, your personal list could include going out to the movies, eating in good restaurants, and buying the last gadgets, while someone else might
Category 3: 20% savings
Probably the most important category in this 50-30-20 rule is savings because this is the category that you’ll have to rely upon for your future. Savings, in this particular situation, refers to both savings and investments.
Savings could take many forms, from your emergency cash to your savings accounts. It could also include any money market investments you might have made so far.
You need to keep in mind that investments refer to any kind of money you have set aside to generate income. It could also include investing in the stock market, buying real estate, or even setting up your retirement accounts.
What you need to prioritize for savings
Your number one priority should be your emergency fund. It’s super important to have 3 to 6 months’ worth of living expenses saved at all times.
Besides that, you need to focus on your retirement savings, which could also include putting money into a company-sponsored 401(K) plan or even an IRA. If you’re wondering whether or not you should get a financial advisor, you could hire one to help you with this.
How to create a budget with the 50-30-20 rule
The efficient 50-30-20 budget rule is quite simple, as you can see, and it only has a few steps to get started, such as:
Know what your income is.
First, you need to figure out your after-tax income. This kind of income is basically the amount of money you have left over after paying your taxes. Naturally, we’re talking about federal and state taxes, but also about your Medicare costs. And last but not least, your Social Security!
Split your income into three main categories.
Once you’ve decided what your after-tax income is, this is where the fun begins. It’s time to split your income into three spending groups. You can simply do this by creating your budget or using the 50-30-20 budget template, and then you’re all set.
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