How the 50/30/20 Budgeting Rule Can Help You Save Money
Struggling to save money and pay off debt? Try the 50/30/20 (also known as 50/20/30), a popular budgeting method introduced by US Senator and bankruptcy expert Elizabeth Warren. She first pitched the idea in “All Your Worth: The Ultimate Lifetime Money Plan,” a book that she co-authored with daughter Amelia Warren Tyagi.
The 50/20/30 budgeting rule is a simple strategy that involves breaking down your after-tax income into three spending categories:
- 50% - Needs. These are your living expenses and essentials, such as groceries, housing, utilities like electric and water bills, gas and transportation
- 30% - Wants. Also called flexible spending, these are all the things you want but don’t necessarily need, like shopping and Netflix subscription.
- 20% - Financial goals. These include your savings, investments and debt payments.
How It Works
The proponents of the 50/30/20 budgeting rule believe that the simplicity yet effectiveness of the strategy can help many people, especially those who can’t balance saving and spending, as well as those budgeting novices who don’t know where to start. Building up a healthy money saving habit is key to being able to finance your new car loan or even your next vacation.
1. It ensures that you save a portion of your income every month.
Budgeting becomes easier if you have a guide to follow. You will become more aware of your money. This awareness encourages you to manage your finances wisely and motivates you to set aside a portion of your monthly income for savings simply because it’s part of the framework. Stick to the 50/30/20 rule until it becomes a habit.
2. It helps you determine the “right” amounts for spending and saving.
Since the percentage amounts for spending and savings are already determined by the three categories, you don’t have to make a wild guess on how much income percentage should be allocated for your needs, wants and financial goals.
Lauren Bowling of Financial Best Life believes that young people struggle with budgeting because they don’t know how to allocate their money:
“When I was 24 and living on my own for the first time in New York City, I had no idea what the appropriate amounts were for spending. I think this is what a lot of young people struggle with when creating budgets. If you’ve never been out in the world, how do you know what is, or isn’t, normal or acceptable? … Having that ability to make choices is what could make the 50/30/20 rule the most effective budget plan for your financial goals.”
3. It’s simple to understand and implement.
The 50/30/20 framework is relatively simple and easy to follow. You won’t need to create complicated spreadsheets with various categories for spending, savings and investment just like in traditional budgeting. The percentage amounts for spending and savings are already sorted out in three basic categories, so you’ll have a clear picture of budget needs.
To set up your very own 50/30/20 budget, you just need to:
- Calculate your monthly net income.
- Determine your regular expenses and decide whether one is a “need” or a “want”. (You can check your expenses and savings on your latest bank and credit card statements).
- Add up the sum of each category to see the breakdown of your spending habits.
- Limit your needs to 50% and your wants to 30% of your net income.
- Allocate the remaining 20% on savings and debt repayments.
4. It provides flexibility.
The 50/30/20 rule is not unalterable. You can adjust the percentages to make it work better for you, like a 40-20-40 or 80-20 rule. If you want to prioritize debt repayment, for instance, you can allocate 60% on your financial goals and assign the 40% for your needs and wants. What’s important is that you’re covering your needs, wants and savings.
“It’s not about the exact percentage breakdown, because all budgets will be slightly different. The key is to take action and use a system to help you stay consistent in managing your money every month, and making sure you’re covering your expenses, being responsible by saving for tomorrow, and giving yourself some room to enjoy life today,” says Eric Roberge, a financial planner at Beyond Your Hammock.
5. It’s not restrictive.
The 50/30/20 rule gives you the freedom to spend on your wants without neglecting your savings account. Because you always have some allocated money for fun, you won’t deny yourself the simple pleasures of life and feel miserable. If you’re contented and happy with your budgeting path, you’ll more likely to stay the course and eventually reach your desired financial stability.
A Chance to Reevaluate Your Budget
Aside from helping you save money, the 50/30/20 rule also gives you the chance to reevaluate your budget. If you’re spending too much on the “wants” category, for instance, you’ll be made aware of this. Perhaps it’s time to cut down some unnecessary spending? In the same way, if you spend more than 50% of your living expenses on the mortgage alone, it’s time to reevaluate your living situation and consider renting in a more affordable place.
Although popular and recommended by many financial experts, the 50/30/20 budgeting rule may not work for some people. It is not practical for those who have lower incomes and struggle with allocating a portion of their money on “wants” and “savings”. People with heavy debt may also need a more detailed and personalized budget plan than a 50/30/20.
Put the 50/30/20 budgeting rule into practice and when you're ready, give us a call on 1300 722 210 or fill out our quote form and one of our expert lending managers will be ready to perform a financial health check and assess your ability to acquire finance for a car loan or a personal loan.