The 50 30 20 Rule of Money: Easy Budgeting for Beginners
In the age of financial chaos, we could all use a simple and easy budgeting plan to help us manage and master money. The 50 30 20 Rule of Money, sometimes referred to as: The 50-30-20 Budgeting Rule is a basic money management method that will aid even a beginner to save and invest for financial freedom.
Here are the 50 30 20 budget benefits, steps, examples, processes, ideas, and calculators to make your weekly or daily budgeting easy and effective if you’re a beginner.
What is the 50 30 20 Rule of Money?
Overview
The 50 30 20 rule of money is a budgeting theory that allows you to save money properly. Many financial freedom advocates and F.I.R.E addicts thrive by this. It is simply the allocation of your after-tax income into three (3) broad boxes. Namely: 50% for your Needs, 30% for your Wants, and finally, 20% for your savings.
Origin
Officially attributed to Senator Elizabeth Warren who advocated its principles and usage in her book, All Your Worth: The Ultimate Lifetime Money Plan. It is the basic tri-allocation of your income to give you peace of mind in the journey of life; and for the attainment of financial freedom.
Purpose
Having five main purposes, the budgeting framework seeks to help the individual achieve all or most of these:
The 50 30 20 BUDGET BENEFITS:
- Set and Achieve Financial Goals
- Manage your Needs
- Control your Wants
- Allocate your Savings
- Make Adjustments
How to Effectively Implement the 50 30 20 Rule
The best way to set the 50 30 20 rule of money into action is to follow these simple steps:
Set and Achieve Financial Goals
This is a must, but not exactly a requirement. Discipline yourself to set your personal finance goals in advance just to keep things in perspective. Here, you may talk about the amount that you’ll need (or want) by the age of retirement, and what types of investments and assets would take you there.
Manage Your Needs
Reserve 50% for your life expenses. These are your needs. They are urgent, important, and cannot be done away with. Meaning, there may be unpleasant consequence involved in not settling them. Limit your costs in this category to a maximum of half of your after-tax income.
A bird’s eye view of your needs:
- Rent / Mortgage (minimum payments)
- Transportation / Car Payments
- Essential Groceries
- Healthcare
- Childcare
- Insurance
- Pets (Food, Grooming, Vet)
- Bills (Utilities, Cell, Internet)
The list above varies from one individual to the other – and a family of 4 with pets would certainly have a different mix than a single person living alone or cohabiting with a roommate.
Control Your Wants
Use 30% for your wants. Just 30% you might say? Yes. Your wants and made up of the finer pleasures of existence and may not constitute an actual need. How do you differentiate between a need and a want? If you can live without it – it is a want.
Here are a few examples of wants:
- Entertainment (Streaming services, etc)
- Eating Out
- Gym Memberships
- Clothing & Accessories
- Vacations (Flights, Hotels, etc)
- Large Purchases (New furniture, etc)
- Extra Groceries (off the primary list)
- Hobbies (and other fun stuff)
Allocate Your Savings
Set aside 20% for your savings. Just like the wants and needs sections above, you might want to fight to keep it at least 20% – or even better. The more you have in this category, the more you’ll be on track to achieve important financial goals. If you have less than the 20% threshold, start trimming the wants section.
Some sound objectives for your savings:
- Eliminate Debt (Credit Cards, Student Loans, etc)
- Create an Emergency Fund
- Invest for Retirement
Make Adjustments
Automate and simplify the entire processes of your budgeting. You can adjust and optimize the three categories if you find some spilling over into others. If you have a spill-over of wants and needs towards ‘savings’, this is a good thing. If you have the reverse, that’s a red flag.
Keep trimming and ploughing the rows of your financial garden over time. Optimize it for maximum efficiency within a few weeks. Use Apps to get notification and prompts for saving and payment schedules. Cut your costs by living within your means; even if you have to live on beans.
Example of the 50 30 20 Budgeting Tenet in Action
The budgeting and allocation of your income can be implemented in a variety of ways. Be creative with its use. Let’s take a simplistic example of a fictional character named Jason Hackman. Based on Jason’s annual income and tax bracket – taking his filing status into consideration, we have $45,000 of after-tax income to work with.
To get Jason’s monthly net income we divide $45,000 by 12 = $3,750 (per month).
We allocate 50% for NEEDS = $1,875
Then, allocate 30% for WANTS = $1,125
Finally, allocate 20% for SAVINGS = $750
We arrived at a basic math of: $1,875 + $1,125 + $750 = $3,750
Worthwhile 50 30 20 Objectives to Pursue
BIG SPENDING PLANS: Large Purchases, Refreshing Vacations
Your budgeting strategy doesn’t have to be slavish. You can live like a king or queen sometimes by planning for some of the big purchases ahead of you. Your 30% allocation for your wants can allow you to re-decorate your home, and buy new furniture or pay tuition.
In Jason’s case of having $1,125 for the wants category, he can make sacrifices by trimming other wants. He can rank his furniture purchase as high priority. Then set 50% (for example) of the $1,125 aside each month for the next 3 months to gather a total of $1,687.50. (Meaning… 50% of $1,125 => $562.50 X 3 months = $1,687.50)
BUILD SAVINGS: How this Budgeting Rule Can Help You Save Better
The philosophy behind the 50-30-20 rule is to free up enough money to allow a definite allocation of about 20% of your hard earned after tax income into savings. These savings contribute to a nest egg that is invested in long-term high yielding asset class such as stocks. You can learn to trade stocks step by step to give you a confidence boost when you’re starting out as a new investor.
Read Next:
- Ways to Maximize Retirement Savings: Leverage Investments to Retire Early
- How to Learn About the Stock Market and Investing for Beginners
· Financial Freedom Fund
This investment fund would be the blood line for your financial freedom. You will be able to retire well, or possibly retire much earlier than other people in the same age range and career sector. Even if you’re investing as a beginner, you can’t go wrong with index funds or ETFs for starters.
Note Worthy: Beginner’s Guide To Stocks: 10 Tips To Note Before You Invest
· Emergency Fund
It’s crucial to build an emergency fund to operate as your personal financial backup plan. Allow these savings to equal about 6 months of your living expenses (even better if it’s 6 months of your entire monthly income). Funds would be mobilized in the event of a loss of primary income. The cash will sustain you for the duration of 6 months until you get back on your feet.
· Large Purchases Fund
As discussed previously above, if you have to make a large purchase such a new furniture, or house renovation, you would need to save up for the full sum over time. Otherwise, you’d have to resort to using debt. There is nothing wrong with using credit cards. But our main objective is to move you from an interest paying slave, to becoming an interest earning sage.
ACHIEVE FINANCIAL FREEDOM: How to Become a Millionaire
You’re on your way to financial freedom when you adopt a disciplined approach to the use of the 50-30-20 rule of budgeting. You don’t just save your way to a million dollars, you compound it year on year in investments. The constant contribution of your 20% savings to that investment makes all the difference.
Get Out of Debt: How to Eliminate Debt Using the 50 30 20 Rule
You have a maximum budget allocation of 20% to use in settling your debts here. There are debt eliminating strategies that help you snowball these things out of your life.
- Credit Card Debt: This has to go systematically to free up more cash flow for compounding towards financial independence.
- Student Debt: Set a deadline with lump sums allocated within the 20% savings budget limit.
- Home Mortgage: Part of the 50% Needs section of your 50 30 20 rule budget will settle the minimums, while you also allocate a little extra from the 20% savings section to pay it off faster.
While paying off debt, keep investing part of your 20% savings allocation to investments along side. Never ignore nor postpone your financial freedom fund. You might miss out on the power of compounding if you put it on hold until your debt obligations are satisfied.
Set Financial Goals: How to Set Financial Goals Using the 50 30 20 Blueprint
Financial goals will give you something to aim at. If you want to retire early someday, you’ll need financial freedom goals that compliment your budget allocation. The goals will restore your confidence and your identity, anytime you feel over whelmed with financial pressures of life. It will give you hope and assurance of a better tomorrow.
Track Expenses: How the 50 30 20 Rule Will Help You Track your Expenses
How can you track where all your hard earned dollars went? Can you achieve that without burying your head in a pile of accounting paper work? The 50 30 20 budget gives you a bird’s eye view of what was spent and where – with categorical accuracy.
Other Benefits and Applications of the 50 30 20 Rule
Minimal Tracking
Chart and track your 50-30-20 budgeting strategy with ease every time. You can do it with Apps and spreadsheets, or in writing everything in a note book or journal the old fashion way. Analyze your personal efficiency in the use of the 50 30 20 money rule month by month.
Monitor improvements and ensure that your needs and wants section are stable or reduced over the course of time. You can also evaluate the growth of your savings portion. See it grow from 20% up to the 30s or even 40% or more each month.
Excellent Flexibility of the 50 30 20 Rule of Money
You are not confined to hard and fast rules here. Definitely tweak the official allocation prescriptions to suit your own needs, wants, and savings until they are met – in your own eyes.
Your after tax income may rise over the years if you’re an employee in a formal engagement. With this comes also the urge to ramp up your consumption. Both the needs and wants section may move steadily upwards with each passing pay raise or bonus. But you can put your foot on the brakes and rake it all towards the savings section in order to retire early.
Free Templates & Tools
- 50-30-20 rule based apps out there
If you want to speed things up and avoid losing sleep over where you last placed your budgeting note pad; worry not further. These Apps are great in helping you plan your money – your way.
- Sample 50-30-20 Calculator worksheets to download
Use these valuable work sheets to simplify the entire budgeting process. You can find printable pdf files for a hands-on pen-to-paper approach. Or download the spreadsheet equivalents that will help you budget and save your way to financial independence.
Apply the Pareto Principle with the 50-30-20 Rule of Money
As with principles and theories, you can create an explosive combination by merging two or more together. In the case of our 50 30 20 budget rule, we can mix things up with the Pareto Principle (also called the 80/20 Rule).
The Pareto Principle states that 80% of our wealth (or financial freedom) will come from 20% of our total income. Meaning a whopping 80% of our after tax cash inflow go towards paying others. Our living expenses may make our lives comfortable today; but it is rather our 20% portion that we get to keep will be directly responsible for compounding and growing our financial freedom fund.
Make it a rule to keep the 20% intact. Try nibbling portions of your Wants and Needs sections to add about 2% to 5% each month. This can help you grow even wealthier faster.
Apply the 50 30 20 Principle to your Business Finance
The 50 30 20 rule of money can be applied in many ways. It is as universal as can be. You may even use it in allocation of capital in your investment strategy, or your small business finance methods. It is your duty to run an efficient and lean enterprise if you’re small and starting out. Your side hustle finances need all the boot strapping constraints to prevent it from bleeding cash.
Make it a point to place some sort of an embargo on all business expenses. If you limited all operational cost to just 50%, and allocate 30% to Selling & Marketing, you have 20% to pay out to shareholders. In our case– the solopreneur could fork up to 20% into their investment nest egg. Your small business can then decide which strategy would yield the very best results for all your efforts.
See below for allocation ideas from your 20% small business reserves:
- Taking Vacations (Paying out the 20% perhaps as a dividend to enjoy the fruits of your labor)
- Buying Financial Assets such as stocks, bonds, mutual funds, etc (Buying for yourself or allocating them as marketable securities owned by your business – for capital preservation)
- Reinvesting back into Your Business for onward growth. (Track and expect a fair ROI from that 20% strategic allocation)
Similar Budgeting Frameworks Similar to the 50 30 20 Rule
There are countless formulas out there today for helping you budget and manage your money. Among the top ones are:
1) Zero-Based Budget
2) Envelope Budget
3) Pay Yourself First Budget
4) Priority Based Budget
The 50/30/20 Budgeting Rule in Action
The awesome video contains a visual representation of your needs, wants, and savings. See allocation examples and how you can apply it today towards a better money management program this year.
Going Forward
This budgeting rule is simply indispensable. You can make it a constant in your life, or reel the continuous stress of financial struggles in its absence. Make it as macro or as micro as you want it to be. You choose. Start small, and grow its strategic implementation grade by grade.
So tell us in the comments below if you have such a budgeting plan in place. Do you do the exact same allocations used in the general 50 30 20 rule of money? Or you have a more customized implementation?
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