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50/30/20 Rule: How Should I Spend My Money Wisely?There are many ways to spend money wisely. One of the most effective and popular strategies is the 50/30/20 budget percentage rule. You have probably heard about it at least once, and it seems that it has existed for a long time. However, this technique was developed in 2005. It’s not outdated and works even in current conditions. Let’s talk more about this saving percentage rule and how to apply it in your life effectively.
What Is the 50/30/20 Rule?In 2005, Elizabeth Warren, a US senator and law professor, published a book titled “All Your Worth: The Ultimate Lifetime Money Plan.” In it, the author first spoke about the 50/30/20 budget plan. In simple words, it’s an intuitive way to keep a personal and family budget. Half of your income should be spent on needs, 30% on wishes, and the rest of the money should be saved.
The convenience of the formula lies in the fact that the specified ratio is not strict. The author noted that although it’s well balanced, you can come up with any percentage that is comfortable in your current life situation. The main thing is to start counting income and expenses and stick to some kind of plan because most people simply don’t have one. You can do it manually by writing transactions in a notepad or using any budget creator for portable devices or PCs. Regular use of these rules to save money leads to the fact that you’ll be able to manage funds effectively, not get into debt, and be ready for any surprises and difficulties.
50%: NeedsMost of your income goes to needs you cannot eliminate. Within the needs/wants/savings budget strategy, these may include the following categories:
- rental of property;
- payment of utility services;
- health care and insurance;
- transportation, etc.
30% WantsAs part of the needs/wants/savings rule, the second paragraph includes everything that makes your life more comfortable and enjoyable:
- dinners in restaurants;
- coffee to go;
- subscriptions to streaming services;
- working out in an awesome gym;
- vacations abroad;
- hobbies, etc.
20% SavingsThe 20 savings rule is what you save for the future. The first thing you need to do is form an emergency fund out of this money. Experts recommend collecting the amount that you can live for at least three months without receiving funds or to pay for an expensive operation, if necessary.
According to all the classic rules of money management, the rest of the money is best invested. Choose any investment strategy and method that suits you: cryptocurrencies, stock exchange, bank deposits, etc. You can also use some of these funds for retirement and other long-term goals. While savings may not seem like the most necessary things at first glance, they are extremely important. According to statistics, modern people have practically no savings, and at the same time, the amount of debt is growing from year to year.
An Example of Budget Rules of ThumbSo that you can more accurately understand how the described rule works, let’s look at a 50/30/20 budget example. First of all, determine the amount you can dispose of. It’s formed after you have summed up the receipts from all sources of income and paid the taxes due. If you prepare a family budget, also consider income from your partner.
After that, you are left with, say, $3000. According to the rule described above, you can spend $1500 of this amount on must-have items, $900 on various desires and “pleasures,” and the remaining $600 should be put in a moneybox. Now you can answer yourself, “How much should I be spending a month?” Draw up a budget and spending plan for the next month based on the amounts received.
Elizabeth Warren, in her book, insists it’s unnecessary to track literally every cent and reshape the usual regime instantly. It can adversely affect your mental health and deprive life of any joy. Knowing how to budget your money the 50/20/30 rule, you’ll clearly understand what exactly you spend money on. Just try to stick to the given volumes. And if you don’t succeed from the first try, it’s okay.
50/30/20 Rule vs. Other MethodsThe described method with income division into three sections is the most balanced. It has a place for both pleasant little things and important savings. It tends to put less pressure on you. However, of course, there are other methods:
- Economical budget. You save half of your income and dispose of the other half as you see fit. It has no place for “wishes.” This strategy allows you to raise the necessary amount quickly, but it requires you to limit yourself, detailed control over expenses, and have a certain amount of stress resistance.
- 80/20 rule. It’s similar in many ways to the main method described but requires much less control over spending from you. You put 20% into your moneybox and dispose of the rest as you please. It’s sometimes referred to as the “Pay-Yourself-First Method.”
- Excessive budget. Your income is halved between needs and wishes in it, and nothing is saved as an emergency fund. It’s easy to manage but at the same time carries the risk of increasing credit debt since it doesn’t protect you from possible financial shocks at all.
Make the 50/30/20 Rule AutomaticControlling your budget and keeping track of every dollar spent manually might be tricky. That’s what apps and services like Saldo Finance are for. You can connect to it your bank accounts so that all transactions are automatically accounted for. Set limits on certain product categories, and the system will notify you when you reach them. Even such an effective method as 50/30/20 requires some attention and skills. Planning and budgeting are easy with a dedicated app and tips to save money from salary. Thanks to it, you’ll be able to move to a new form of cost control without too much stress.
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