The 50 30 20 Rule: How to Budget Your Income Like a Pro

Have you ever tried the 50 30 20 rule of money?

It is mid-month, and you check your bank details only to find out a little amount is left from the salary you earned last month.

No, the landlord has not increased the rent; even the water and electricity bills are the same as last month. Then why the sudden fall in the remaining balance?

I hate to say this, but the main reason is poor money management and personal finance. Maybe you could take the last bus instead of that last-minute Uber. You could also stop yourself from the outside dinners.

If you stick with the saving money rule of 50,30,20, you can manage it all.

50 30 20 Rule: What Is The 50/30/20 Rule Of Money?

We often get carried away and use the pay-later options and our credit cards too much. No, using the credit card or the UPI payment scanner is not to blame. The lack of consideration for necessary and unnecessary spending incurs outstanding living costs. Thanks to the 50 30 20 rule, you can avoid such mistakes and handle personal finances better.

Elizabeth Warren has suggested and made the 50-30-20 rule of money popular through her book: All Your Worth: The Ultimate Lifetime Money Plan. According to this rule, an individual can split their after-tax income into three different parts and use them for specific reasons.

The first part, or 50% of the after-tax income, goes into the part of fulfilling needs. 30% of the rest of the income is for wants. The last and third portion, 20% of the income, should go into savings.

If you are having difficulties setting brackets for different expenditures, then this rule of money will be helpful. Go through the sections below to understand how to spend each of the portions of your after-tax income.

Spend 50% On Needs

The first part of the 50 30 20 rule of money is the portion you use to spend on your needs. Needs are usually survival cost that lets you live peacefully without any troubles. These are the necessary living costs such as –

• Paying bills
• Paying the mortgage
• fetching groceries or food
• Paying insurance premiums
• Paying rent
• Minimum debt repayments

These are some obligations of life you need to fulfill to live a normal life. So, if you are following the budget rule of thumb or the 50-30 20 rule, you will spend 50% of your after-tax income on these expenses.

But, if you fail to do any of these things, you will likely be in trouble. Or, in other cases, you will gather more obligations for the next month. The more responsibilities you gather, the more you will end up paying. However, you should also remember that the need section does not include the cost of movie tickets or OTT subscriptions.

Those are in the want section. If you are having trouble managing your need section, then you will likely reduce money from the want section.

Spend 30% On Wants

The want section includes all the nice things you can buy with your after-tax income. No, these do not help you with your survival needs or obligations. It is difficult to live in today’s world with bare necessities alone.

There are so many expenses we can live without. According to Elizabeth Warren, these expenses are included in the want section. An earning individual can spend 30% of their earning on things they want. Some of the expenses included in this portion of the 50 30 20 rule are –

• Dining outside occasionally.
• Movie outings.
• Traveling expenses.
• Grooming splurges.
• Hobby-related expenses.

It is possible to reduce your spending in the want section based on your necessities. You can modify your spending. This is when you learn to prioritize necessity and economy over luxury.

It is like going for a Honda instead of an Audi or a Mercedes. You can also share the wifi with your family instead of getting unreasonably costly cellular data packs for every smartphone user at home.

Also, try to avoid any EMIs as much as possible. It is better to build a shopping fund for the different things you want instead of resorting to EMIs. There are many hidden fees included even in zero-cost EMIs.

Keep 20% In Savings

Once your needs and wants are sorted, you can keep the last portion of the 50 30 20 rule for savings. This portion will ensure that your future is fortified. This is the most important yet ignored part of the personal finance checklist.

You cannot skip the need part of the 50 30 20 rule since there are obligations you need to follow. But you can tone down the need part a bit. Instead of making the dinner outings a monthly mandate, you can put the money to good use. Check the IMDb rating of a movie or read some reviews before going to the theater.

Once you have fulfilled all of your obligations and managed your wants, you can keep the rest of the after-tax income in savings. With the money left after this, you can create an emergency fund. This will help you create a small fund you can use during any financial emergencies. This would come in handy if you were to lose your source of income or other legal or health-related emergencies.

According to Elizabeth Warren’s theory, the last part of the 50, 30, and 20 rule can be used for saving and investment. You can use your savings to invest in different ways to grow your money for the future. This will only fortify and secure your future.

Conclusions

The 50, 30, 20 rule is not just a rule of money. It can help you choose a lifestyle. You can use this methodology to easily maintain your finances without having to think about spending your earning in the middle of the month. If you have an idea about your wealth inflows and outflows, you will understand how to maintain it better using the rule of 50 30 20.

Hopefully, you have found the information you were looking for. However, if you have any similar queries you want us to answer, please comment them below.

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