Budget Basics: The 50/30/20 Rule

You probably don’t need to be told that budgeting is helpful, if not essential, for effective money management. After all, budgeting helps to provide you with a clear picture of exactly what you’re working with and where your money is going. At the very least, a budget should keep track of what your income and expenses are for a given period of time, usually on a monthly basis. 

Once you have a good grasp on what you’re taking in and spending, you’re in a better position to make most of your money. So, what should you be aiming for when it comes to your budget? Good question. There’s a tried and true budgeting method that will help you manage your money with ease. It’s called the 50/30/20 rule.

What is the 50/30/20 Rule?

If you haven’t heard of it, the 50/30/20 rule is a guide that will help you budget your monthly after-tax income swiftly, simply and sustainably. Here’s how it works: You’re going to take your monthly income and divide it into three spending categories, specifically, needs, wants and savings. 

How to Use It

You’re going to allot 50% of your income for needs, things that are absolutely essential for your daily life. Think rent/mortgage, utilities, food and transportation. Then set aside 30% for wants, things that aren’t necessarily essential, but nice-to-haves that you want to include in your life. This category is for things like dining out, shopping, entertainment, gym memberships, etc. Lastly, 20% is for savings, you know, money that you set aside for a rainy day or a nest egg. This category can also include debt repayment, if you have any outstanding debts.  

So, that’s the breakdown. Now keep in mind that the 50/30/20 rule is just a guideline. You can adapt it to fit your needs. If inflation makes it hard to imagine covering all of your needs with just 50% of your income, cut some of your wants to give yourself more wiggle room. Your budget may look more like 60/20/20 or even 70/20/10, but make 50/30/20 a goal to aspire to. With diligence and discipline, you’ll be able to get there.