A good budgeting method is a game-changer for most people’s financial situations. If you manage to budget successfully, you have the stability to branch out and live your life to the fullest.
And according to many people, there’s no better way to go than by the 50 20 30 budget rule. Senator Elizabeth Warren came up with this method in her book All Your Worth: The Ultimate Lifetime Money Plan.
The book references over 20 years of research before concluding that you don’t need a complicated budget plan to keep your finances from running away from you. And luckily, the way the 50 20 30 budget rule works is pretty simple to understand.
What is 50 20 30 budget rule?
The rule is to divide up your income left after tax and allocate it as follows: 50% of it for your needs, 30% on your wants, and 20% towards savings. Doing it will keep your expenses balanced, and you can manage your money properly.
Since there are only three categories for you to track, it saves up your time. It also helps you create a personal budget much more easily. That’s because you get to build a more structured spending habit, making it easier to reach your financial goals while at the same time being prepared for any unforeseen circumstances.
Even though this method sounds pretty feasible in theory, the question is whether the 50 20 30 budget rule is practically effective in reality or not. So let’s break it down and see for ourselves.
Needs: 50%
Expenses that come under needs are just about anything you’ll be in big trouble in if not paid on time. They include all your monthly fixed costs such as monthly rent, electricity and gas bills, transportation, health, car insurances, loan payment, etc.
You will have to allocate at least 50% of what you have left after paying taxes to all of these essentials, though it does differ from person to person. There are also ways to bring these expenses down, for example, by moving into a more affordable housing situation.
You should keep in mind that it is alright if you don’t need to spend 50% to cover all your fixed costs, but the amount should go higher than that. You should consider cutting down or downsizing your lifestyle if that is the case to stabilize your finances.
Wants: 30%
There’s no need to be a miser when using the 50 20 30 budget rule because 30% of it goes all into your entertainment.
These are all the costs for things you want to do or enjoy doing. It can include all non-essential expenses such as dining out, shopping, holiday gifts, TV subscriptions such as Netflix and HBO, groceries, etc.
Although groceries lean more into the ‘need’ category, it is still a flexible variable cost; you can choose to spend more or less on groceries depending on your want or need.
This is probably the best thing about the 50 20 30 budget rule; you can enjoy your life while still keeping within your budget and not going overboard. It allows you to spend on things that make life more fun but cautions you whenever your overspending is a chance.
Savings: 20%
Don’t get too caught on entertainment, and remember to leave at least 20% for your savings. This is the amount of cash that’s crucial for your long-term financial goals and any emergencies where you might need some extra money.
You can use this money to save goals, pay off debts, and maybe even towards any extra repayments you’ll have to make. Many people even start preparing for their down payment on their house or build an emergency fund.
This way, planning for the future will have your future self thanking you, so it’s worthwhile to think further ahead than just spending all your money in the present moment.
If you’re interested, you can even think about making IRA contributions, a mutual fund account, and maybe even investing in the stock market. Overall, the 50 20 30 rule is there to help you manage and prioritize what matters and keep your financial balances in check.
Is the 50 20 30 rule worth the try?
So what’s the final verdict? Is the 50 20 30 rule good, or is it just an impractical sham? The truth is that even though the results depend on your living and financial situation, it is definitely worth the try.
The reason is that this budgeting method is fairly simple to understand, and you will lose nothing by trying it out for a month or so. There’s a pretty good chance that you will feel way more organized and confident with handling your money.
On the off chance that you think this rule is just not for you, then you can drop it with no hassle. Because nothing about the method needed some quantum physic level of calculations or organization, to begin with.
If you feel like the budget money 50 20 30 rule is worth the shot, try it out using the 50 20 30 rule budget calculator to make things even easier. There are many budget worksheets available, too, that you can find online to give you a better idea of how to go about it.
