How to use the 50/30/20 rule?
It can be a great help in creating a family budget if you know what to rely on. And the 50/30/20 rule makes that much easier by providing you with a pre-allocated framework.
Since budgeting isn’t just about paying your bills on time, you need some planning. One that will help you determine when and how much you can spend without overspending.
The 50/30/20 rule is a budget planning method that will help you keep your spending in line with your savings goals. This will allow you to be more aware of your own finances and improve your financial health.
What is the 50/30/20 rule?
This budget planning method gives you a framework within which you are given a free hand to further subdivide it. In the name of the rule, the numbers refer to the percentage distribution of the frames. Accordingly, your earnings will be distributed as follows:
- needs: 50%
- wants: 30%
- savings: 20%
Why is the 50/30/2020 rule necessary?
One can make a household budget for many reasons. You may want to reduce your loans or just improve your money management habits.
With this rule, you have the opportunity to find out where to turn for help if you are tempted by a given spending.
The content of each direction for the 50/30/20 rule
50% for needs.
Half of your income will serve you to cover your living needs from it. At first, this ratio may sound a bit high compared to the other numbers, but by the end of this article you’ll see that if you just don’t have an extremely high income, you’ll need it.
The needs category has all the expenses that you almost certainly have to pay to live in society. These costs appear to almost everyone, at most to varying degrees. I am thinking of things like:
- housing
- food
- transport
- overhead
- basic insurance (eg compulsory car insurance)
- dressing
Since you set a budget frame here, you are free to distribute 50% between the different directions. That is, if you live in a garden suburb in a property that is very well insulated and doesn’t even have mortgage on it, you’re obviously going to spend less on housing than someone who just bought out on loan the first property of their life that still needs renovation. However, it is precisely because of the garden suburb that you will spend much more on transport than anyone else.
30% for personal wants
These expenses serve your lifestyle, or more precisely, they improve your standard of living. You can already define these items completely according to your personal taste, and it is far from certain that you will even discover similarities with anyone else.
These may include items such as:
- spent an afternoon in a cafe with friends
- trip
- membership fees,
- subscriptions (gym, advanced services, etc.)
- course training entertainment
Pay attention to this in relation to 30%
Difference between needs and wants
Be able to differentiate between the needs and wants. As long as you can consider it a necessity to buy some shoes for yourself (just so you don’t walk barefoot), the 43rd pair of high heels is nowhere near this category.
The same is true of technology. Although there are areas of life where even the slightest mobile phone is completely redundant, today we can consider its existence as a necessity. Especially if you’re often on the road or working with it. On the other hand, it is far from true that it would always be mandatory to keep the latest top model in your hands.
Finding the balance
Use 30% wisely. No one said it was mandatory for you to spend them all. The more left here, as well as from the previous 50%, the more left for your future goals.
Describing this task is much simpler than when you need to perform it. After all, you need to find a balance when you need to restrain your spending without being a “cheap John,” but you also have to spend money without overspending.
20% for savings
It may sound trite or unimaginative, but there are also retirement savings in this category. This example for a young person aged 25-30 doesn’t necessarily seem burning yet, just remember planning your retirement is important in order to turn the leverage effect of compound interest to your advantage.
Very often, pensions and only pensions are included in this category as examples. Maybe sometimes the child’s future is mentioned here. In fact, it includes long-term savings plans (along with savings for retirement), but much more than that. For example, this category includes the following few items:
- prepay your existing loans
- the build of your emergency reserve
- anything that takes you forward
By prepaying your loans, you no longer have to pay interest on the repaid principal, so you can sleep more peacefully. Whatever happens, the executor will not knock on you because of a loan that has already been paid.
Pay attention to balance
If you ask which is more important, I will say it depends. With a high APR rate or possibly overdue loan, don’t think about the stock market return, but turn whatever opportunity you take into your loans.
Otherwise, think about which one is better for you. You can go through such questions as:
- how much time would you invest
- how much is the outstanding amount and term of your loan
- what your return prospects (and risks) are
- how much is the APR
- how your total payments on your loans relate to your income
After that, you can figure out which one you are doing better. If you would like help from us, contact us and describe in a few sentences how we can get you ahead.
How do you use the 50/30/20 rule?
When planning, the primary thing is to know why you are starting to do it. What is the main goal that makes you feel the need to change your money management habits.
This can be a general goal (e.g., as few loans as possible / most conscious financial decisions), but it can also be a specific, time-bound goal.
You will basically plan your budget in the same way using the 50/30/20 rule as you would with any household budget. That is, you look at where you are right now.
However, these ratios will be of great help to you in finding out which direction you are overspending. This is because you will exceed its ratio. Then you can redesign that area of your life for your purposes as well.
Of course, there are large expenses in life that are inevitable, but they rarely burden you. This could be, for example, repairing the roof. You have to do this, fortunately only every many years. If you see that one of such an item would exceed the limits of that category, calculate the plan without it to get a realistic picture. When planning, however, you will also have to think about reserve formation.
Once you’ve found out where you are now, plan your entire year in light of your expected expenses and revenue. A plain booklet may be sufficient for this, but an excel spreadsheet will make the whole thing more transparent. You can create your own designer, but you can download it from the Silver Moon site.
Click on the picture, to download…
Note on Rule 50/30/20
Try not to take it literally :).
Naturally, if you have an above-average income, you’re not going to eat 12 times a day just to finally run out of 50%.
Your life may not be like everyone else’s. It’s a framework that provides help, a kind of crutch. Consciously review your spending, determine what is important and what is less priority. After that, you will be able to create a household budget that will get you the most out of your money.
Questions:
- Which category has exceeded the limit for you in applying this rule?
- How viable is 50% for living on your own income level?
- What other topics would you include in the 20% section?
You can contact us here with your question and I will be happy to read your post in the social media comment.