The 50/30/20 Rule

If the word budget stresses you out and makes you think of living paycheck to paycheck, then you are not alone. It just means that you have the same ideas about budgeting that most people do. However, a budget isn’t just something that lower income families need to adhere to. Everyone should create a stick to a budget of some kind.

A budget is just the tracking and estimation of income and expenses for a given period of time. While creating a budget is necessary for those who have smaller incomes, it makes sense for everyone to have a budget, regardless of their income level. The 50/30/20 rule is widely used in the world of personal finance, and is often recommended by financial planners.

The idea of the 50/30/20 rule is that you can proportion your after-tax income to help you achieve your dreams, even if you live on a limited income. It works on any income level and will make controlling your finances much simpler.

As with most guidelines, this rule can be customized to fit your own individual lifestyle and expenses, but following this guideline can only help you on your journey to financial freedom.

The 50

This portion represents the 50 percent of your income that should go to your essential expenditures. Housing, utilities, groceries, and transportation costs should all fall under this category. These are expenses you would have regardless of where you lived. For some people, 50 percent will seem like a very high percentage, and others may not have the luxury of only spending 50 percent of their income on essentials.

The word essentials can be fairly broad. For instance, if you work from home, your internet could count as an essential, but your transportation costs would decrease in this category. If you live paycheck to paycheck, you might be putting 80-90 percent of your income towards essentials just to get by.

The 30

The next 30 percent of your after-tax income should go to your personal expenses and splurges. This portion would include that new outfit you have your eye on at the department store. Dining out and entertainment, like going to the movies or your favorite museum, would also fall under this portion of your budget.

This category is important to have, even if you are on a limited income. It is your lifestyle. These are the things you do for fun, and that will keep you from driving yourself crazy if you just pay bill after bill.

If you are on a limited income, you can pare this section down to the occasional dinner out and a Starbucks coffee. However, this category also includes expenditures such as that third car in your driveway, your boat or RV, and your weekly date nights.

The 20

Finally, the last 20 percent of your income should go to helping you reach your financial goals. This means 20 percent of your paycheck should help your build up six months worth of an emergency fund, paying down any debt, and saving for your retirement.

If one of your financial goals is to take a big vacation to Hawaii, those savings would fall into this category. This is the portion of your income that will allow you to live the life you want later on down the road, even when you have retired.

Final Thoughts

The 50/30/20 rule is important because it provides the basic breakdown for how much of your income should go to your essentials, your lifestyle, and your financial goals. If you have a hard time determining which of your expenses are needs or wants, write them down. Ask yourself, if you lost your job today, what would you cut back on first? Those expenses are most likely going to be in your lifestyle category.

Don’t be scared to map out your finances, you may surprise yourself. You may find out that you spend more on your essentials and have a little room to splurge on yourself, or you may have to come to terms with the fact that you spend way more than the 30 percent on your personal lifestyle. Either way, writing it down will help you to visualize where you are, help you map out where you want to go, and how to get there.

If your current budget doesn’t match what you want, do not despair! There are ways to get where you want to go. Try to re-evaluate your budget against the 50/30/20 rule, and determine what changes you need to make. You can create the budget that works for you!