What is the 50/30/20 Rule?
The 50/30/20 rule is a straightforward budgeting method that divides your after-tax
income into three categories: Needs, Wants, and Savings.
How to Apply the Rule:
1. 50% – Needs: Allocate 50% of your income to essential expenses. These are your
needs – things you must pay to live and work. This category typically includes rent or
mortgage, utilities, groceries, insurance, and minimum debt payments.
2. 30% – Wants: Dedicate 30% of your income to your wants. Unlike needs, these are
not essential but they enhance your lifestyle. This can cover dining out, hobbies,
Netflix, and other leisure activities.
3. 20% – Savings and Debt Repayment: Put the remaining 20% towards savings and
debt repayment. This includes building an emergency fund, contributing to retirement
accounts, investing, and paying off any debt beyond the minimum payments.
Why Use This Rule?
● Simplicity: It’s easy to understand and implement.
● Flexibility: It works for various income levels and can be adjusted to fit personal
financial goals. You can adjust and use the 70/20/10 rule or even 80/15/5.
● Balance: It ensures a balance between meeting current needs, enjoying life, and
securing financial future.
How to Adjust the Rule When Rent Is High
Your housing costs can really shape which rule is best for you. Here’s how to tweak
the 50/30/20 rule based on what you spend on rent or mortgage:
● If your rent / mortgage is under 30% of your income: The 50/30/20 rule could
be your go-to. It’s balanced and manageable.
● Rent between 30-40% of your income? Consider the 60/20/20 approach. It
gives more to your basic needs, which is helpful when living costs are higher.
● Spending about 40% on rent? The 70/20/10 model could work better, offering
a more practical approach for higher rent situations.
● If your rent is as much as 50% of your income: The 85/10/5 rule is designed
for such cases, focusing heavily on essential expenses.
No matter which rule you choose, aim to save at least 5-10% of your income. This
small step is vital for creating a safety net for unexpected costs and emergencies.
Consistently saving a little can lead to a big amount over time. Plus, it helps you build
a saving habit, which is essential for your financial health in the long run.
Remember, these rules are just starting points. They depend on your living costs and
income. Use the “Steward Sheet” Calculator under Products page to fine-tune these percentages. When your
financial situation changes, like a pay raise or lower housing costs, adjust your
savings rate accordingly. Keep playing with the numbers until you find what works for
you.
Tips for Success:
● Keep track of your spending. Use our ‘Steward Sheet” under Products page.
● If necessary, adjust the percentages to better fit your life.Guide 503020 – Budgeting Rule Article
● Consistency is key. Stick to your budget to make the most of it.
Conclusion
The 50/30/20 rule offers a balanced approach to managing your finances. By
dividing your income into clear categories, it simplifies decision-making and helps
you build a strong financial foundation.
Remember, it’s flexible. Adjust it to suit your circumstances and always prioritize
saving, even if it’s a small amount
