Trending
Live a financially comfortable life with the simple 50/30/20 rule
I really wish I knew this in my 20s!
Jamie Maraña
06.11.21

Why is it difficult to save money? Or another way to phrase it, why does it seem like saving money is so hard? It’s a pretty common question that people often wonder about. The concept of “saving now to be able to enjoy later” is hard to grasp, but one that could make the difference between financial disaster and financial freedom in the future.

But there are also several reasons why saving money is difficult, such as low income, debts, and losing control when you’re at the groceries for example. Some are even afraid of looking at their bank account, thinking that it’s okay as long as it has money, they’re doing okay.

Pexels - @Karolina Grabowska
Source:
Pexels - @Karolina Grabowska

Saving money should be a priority

Thankfully, your way of spending can be controlled. The internet is abundant with money-saving tips and strategies which most people say are effective. There are budgeting apps to help you allocate your monthly income and of course, there’s the 50/30/20 rule.

Pexels - @Karolina Grabowska
Source:
Pexels - @Karolina Grabowska

What is the 50/30/20 rule?

This financial rule is a way to allocate your budget according to three categories: needs, wants, and financial goals. The idea was popularized by Sen. Elizabeth Warren (a Harvard law professor when she coined the term) and her daughter, Amelia Warren Tyagi, in the book All Your Worth: The Ultimate Lifetime Money Plan.

Pexels - @olia danilevich
Source:
Pexels - @olia danilevich

The 50/30/20 rule is a guide to help you properly allocate your after-tax income: 50% to “needs,” 30% to “wants,” and 20% to your financial goals. Needs are rent or mortgage, groceries, and utilities. Wants on the other hand are vacations, hobbies, monthly subscriptions, etc.

Financial goals are for all your savings and goals, such as retirement contributions, saving for a house, buying a new car, so on. It is also for debt payments if you have any.

Pexels - @energepic.com
Source:
Pexels - @energepic.com

Following this rule is the first step

Pexels - @Nataliya Vaitkevich
Source:
Pexels - @Nataliya Vaitkevich

Since this is just a guideline for planning your budget, you’ll need to supplement it with something to monitor spending, such as a budget tracker. It is also highly adjustable, so you may adjust the percentages based on your personal circumstances.

Pexels - @Andrea Piacquadio
Source:
Pexels - @Andrea Piacquadio

Most people save too little and unknowingly spend too much. The 50/30/20 guideline is a way to become aware of your financial habits and limit overspending and under-saving. The idea is to spend less on things that you can survive without in order to prepare for the future and unforeseen circumstances.

How does it work?

1. Calculate your monthly income – This is your monthly after-tax pay.

2. Calculate a spending threshold for each category – Multiply your take-home pay by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals) to see how much you should ideally spend in each category.

The Balance
Source:
The Balance

3. Plan your budget around these numbers – List and tally your expenses for each category to see if you’re spending less than the monthly targets you established in the prior step.

4. Follow your budget – This is possibly the most important step since all of this budgeting will still depend on your control. Continuously track your expenses each month and always stick to your spending thresholds.

Pexels - @Karolina Grabowska
Source:
Pexels - @Karolina Grabowska

Figuring out your finances is confusing and it’s often hard to know where to start. That’s why the 50/30/20 rule is ideal for people who want to start saving because it’s an easy way to get a handle on something that can otherwise be intimidating.

Please SHARE this with your friends and family.

Article Sources:
To learn more read our Editorial Standards.
Advertisement