The 50/30/20 rule of budgeting: How to apply it?

Creating a budget for yourself to pay your bills on time and save for retirement amid high inflation while still having enough to enjoy your hard-earned money is the dream. But the truth is, you can make it your reality with the 50/30/20 rule.

One of the more popular ways to go about it is through the 50/30/20 budget rulebook. Also known as ‘the balanced money formula’, the 50/30/20 rule was popularized by U.S. Sen. Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan. Here is how it functions: 50% on needs, 30% on wants, and 20% on savings.

When you set up a budget, you should keep these things in priority:

This simple and easy rule can help you develop a budget that you can work and stick with while ensuring you meet financial objectives over time.

50% Needs

Needs, these are things you absolutely require. In the 50/30/20 rule, these are things that you need to pay for, they are considered necessary to survive like:

Groceries

Utility bills

Rent or mortgage payments

Car payments

Health care

Minimum debt payments

This is what is defined as a need. It doesn’t include items like a Netflix subscription, Starbucks or going to a game.

So, half of your income must cover all your needs and obligations. If in case you are spending more money on your needs, then you need to re-evaluate your expenditure and figure out where you need to make changes to your lifestyle. Perhaps, live in a smaller home, so you don’t have to pay too much rent or learn a necessary life skill like cooking, so you don’t need to eat out more often.

30% Wants

In the next category of the 50/30/20 budget rulebook comes wants, and these are simply things that are not essential. These include:

Dine out

Movies

New clothing accessories

Tickets to concerts or sporting events

Vacations

Latest fancy electronic gadget

Ultra-high-speed internet

When it comes down to it, everything in the want category is optional. None of it is something you genuinely need. You can cook food instead of going out, you can exercise from home instead of hitting the gym, watch a game at home instead of buying tickets for the game.

It is also all those upgrades you were thinking about, such as a costlier watch you were planning to buy, purchasing a sportscar instead of something more economical. To put it simply, wants are the little extras you spend to make your life more enjoyable.

20% Savings

Finally, in the 50/30/20 rule, the 20% is meant for you to save and invest. This includes:

Setting up an emergency fund in your savings account

IRA contributions to your mutual fund account

Investment portfolio

As most financial consultants will tell you, you must save at the very least three months of your savings in an emergency fund. You need to protect your current lifestyle (or reduce your wants) when you face an emergency like losing your job or medical expenses. Once you complete that, start focusing on retirement planning and other financial goals you hope to achieve.

Savings will also include debt repayment. Yes, it is true we kept minimum debt payments in the needs category, but at the end of the day, any additional payments made to lessen the principal amount and future interest can only be a part of savings.

Plus, learning new investing methods like stock trading or commodity trading can also be considered.

When it comes to money, most people will agree saving is difficult. And often, life just throws you a curveball, which you must deal with. But by following the 50-20-30 rule, you should be able to manage your money. Remember, life is meant to be cherished and sticking to a plan will help you cover your expenses, save and do the things that truly make you happy.