You may have heard of the 30/20/50 rule when the conversation revolved around budgeting and saving money.
Budgeting is such a fine financial habit to have, but if you’re stuck on how to construct a budget plan or never lived on a budget, then it’s important to know the 30/20/50 rule.
But how does it work?
The 30/20/50 rule is a simple and straightforward monthly budgeting strategy that helps you plan your expenses for the month. From how much to put into your savings, to your living costs.
It can be broken down into three categories; needs, wants, as well as savings and paying off debt.
Spend 50% of your paycheck to needs.
Everything that comes within the categories of food, shelter, utilities, transportation, and insurance are included in this section of expenses. Some of the examples are:
- Paying rental fees;
- Paying off mortgage payments;
- Utility bills;
- Grocery bills;
- Transportation costs;
- Car expenses;
- Insurance payments; and,
- Medical expenses.
Spend 30% of your paycheck to wants.
In this category, it is anything that is not an essential expense. Expenses that are frankly not required are referred to as wants. You choose to spend your money on certain desires you want, even though you can practically live without them. Traveling, subscriptions, eating out, shopping, and entertainment, all of which may cost you for pleasure. Below are some examples:
- Dining out;
- Shopping bills;
- Holiday expenses;
- Memberships (Gym, and so on);
- Subscriptions (Netflix, Disney+, Amazon Prime); and,
- Buying gifts.
Save 20% of your paycheck to savings and paying off debt.
This category can be divided into two; savings and paying off debt. In order to develop a long-term savings strategy, you need to consistently save 20% of your salary every month. This is to secure your long-term financial plan. Plus, in the long run, you have a fund for emergency and prepared down payment for a property.
Paying off credit card debts and loans debts can be categorized here as well, only if it falls under a minimal requirement.
There are so many perks to budget planning, which includes helping you achieve your financial goals, preventing you from becoming financially swamped, and even helping you prevent or get out of debt. In general, the 50/30/20 rule may be a smart budgeting approach to certain people, but it is not for everyone. It mostly depends on certain circumstances and your choice of lifestyle.