What is the 50/30/20 Budget Rule

Do you consider the word "budget" a four-letter word? You know you should create one, and you know you should have one that you follow every month to keep your finances in check. And yet, the thought of sitting down and figuring out the intake and outflow of your money just seems too daunting and maybe a tad bit depressing, too. Besides, if you give yourself a budget, won't it automatically mean you can no longer spend money on fun things like going out to eat and buying things you want (but don't necessarily need)?

The answer depends on what kind of budget you're using, as there are many types from which to choose. One type of budget to try is called the 50/30/20 rule. It's a way of sorting your finances if you're just getting started with budgeting or you have gotten off track managing your money and need to get back on track.

What is the 50/30/20 Budget Rule?

At its core, the 50 30 20 budget rule is a way to help you reach your financial goals by allocating money into certain "buckets" of spending/saving. It's thought of as one of the easier budgets to manage because it is so simple.

The 50/30/20 rule states that 50% of your after-tax income should be spent on things you must-do or must-have (pay your rent, go to the grocery, buy gas, etc.). The other 50% is split up into 20% that should go into savings and 30% that can be spent on anything else you want (new gadgets, entertainment, dining out, etc.).

By following the 50/30/20 rule, you can learn to manage your money, put away for a rainy day, retirement, or emergencies, and have some fun along the way.

50% of Your Income: Needs

Your needs encompass all the bills you have to pay every month along with the items you need just to survive. Commonly this means your mortgage payment or rent, car payments, health care, groceries, insurance, gas, child care, gas and electric, etc. (Sorry, but that daily cappuccino doesn't count as a need.)

If you've done the math and discovered you require more than half of your budget to cover your needs, consider whether or not there are some things you can cut back on. For example, can you turn down the air conditioning in the summer? Can you move to a smaller house to make your mortgage or rent less expensive? Can you take the subway or bus in your town to work?

This is an area where you'll need to take a good, hard look at what you spend to see if you can make all your necessities fit into that 50%.

30% of Your Income: Wants

Now that you've allocated 50% to your needs, what about your wants? This is where the next step in your 50 30 20 budget planning comes into play. You take the next 30% of your income and allocate it to your wants. Maybe you make room in your budget for a weekly cappuccino as a nice treat on the weekend. Get a gym membership, dine out once in a while, or order subscription-based TV services.

This is an area where you can spend some of your money on items that aren't absolutely necessary for survival. Here, too, you should be careful and make sure these "wants" are only coming out of 30% and not more. If you need to scale back to make it work, then take a good look at what you spend money on and see if you can't live without something to keep your finances in check.

20% of Your Income: Savings

The final piece of the 50 30 20 rule is that 20% of the budget you have left should go into savings. Savings can mean your retirement fund, a bank savings account (don't forget to have money on-hand for emergencies), or other investments.

Some of the 20% can also go into debt repayment. For example, when you want to pay more than the minimum amount on your credit card (the minimum payment amount is accounted for in the 50% category) as these payments reduce the principal amount owed, which in turn reduces future interest, which in turn means savings for you.

Where the 50/30/20 Rule Doesn't Work

The 50/30/20 rule doesn't work for everyone (for example, if you live in a town with a high cost of living or you have a very low income). If that's the case for you, there are many other ways you can create a budget you'll stick to. The important thing is that you are creating a budget that works for you and is creating a financial future so you can live comfortably.

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