There’s good news: You don’t need complicated spreadsheets with countless spending categories, and you don’t need to be a financial expert to understand how much money you can spend. You simply need to follow the 50-20-30 Rule.
What is the 50-20-30 Rule?
The 50-20-30 Rule helps you build a budget by using three spending categories:
• 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work.
• 20% of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (if you have debt, such as credit card payments, student loans, mortgage payments).
• 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on shopping and travel).
Keep in mind that the percentages for essentials and flexible spending are the maximum you should spend. Falling under those guidelines can leave more money for other financial goals.
How to start a 50-20-30 budget:
Figure out what’s currently happening with your finances. First, look at your income to determine exactly how much money you bring home each month. That’s what you’ll base your 50-20-30 split on. Next, track your spending. Yes, that means keeping up with every last cent, from the big stuff such as rent to the coffee that you grab on the way to work. Then divide your spending into one of the three categories: essentials, financial goals, and flexible spending. From here, adjust your spending to ensure you’re falling into the 50-20-30 parameters. If you’re overspending on stuff you want but don’t need, it’s time to cut back to save more.
Why the 50-20-30 Rule works
It keeps your personal finances simple so you can pay your bills, add to your savings, and have the freedom to use some money just for fun. It’s also a good starting point for the budgeting novice. There’s no uncertainty, your action steps are clear, and it even provides for savings, investments, and other financial goals. This makes it much more likely that you’ll stay the course over time, ultimately reaching your desired financial stability.