What Is the 50/30/20 Budget Rule and Does It Really Work?

A Popular Budgeting Guideline Is The 50/30/20 Rule. (Image Source: Shutterstock)

What Is the 50/30/20 Rule?

The 50/30/20 rule is a system to improve your financial health. The method has you allocate your after-tax income to cover your needs, wants, and savings requirements. Here’s how it works:

  • 50% goes to cover your needs
  • 30% goes to cover your wants
  • 20% goes toward financial goals
How To Manage Your Money (50/30/20 Rule)┃Marko — WhiteBoard Finance

Budgeting Allocation

Your needs are the things that you cannot do without. They include fixed costs, such as your rent and mortgage, car payment, and insurances. Also included in this category are food and utilities.

  • Total after-tax income = $5750
  • 50% to needs = $2875
  • 30% to wants = $1725
  • 20% to financial goals = $1150 ($250 of which is already catered for)
Rule of Thumb for Allocating Budget to Reach Financial Goals (Image Source: Shutterstock)

Is 50/30/20 the Best Rule to Meet Your Financial Goals?

Many people have found the 50/30/20 rule to be very useful. Its greatest benefit is its simplicity. Money management can get very complicated, so having an easy-to-apply rule to guide you is very attractive. However, there are some problems with this plan.

50/30/20 Budget Rule To Reach Their Financial Goals (Image Source: Shutterstock)

Other Budgeting Rules

The 50/30/20 rule is not the only percentage guideline floating round. Here are a couple of others that are quite popular:

The 50/30/20 rule is not the only percentage guide (Image Source: Shutterstock)
  • The 80/20 rule: This guideline is even simpler than the 50/30/20 rule. It requires that you put 20% aside for savings and do whatever you want with the rest. This may not be the most practical method for people who are struggling financially. After all, you need to meet your fixed costs every month, no matter how badly you want to save that 20%.
  • The 70/20/10 rule: In this case, you allocate 70% of your after-tax income to living expenses (a combination of needs and wants), 20% to debt payments. and 10% to savings.

Conclusion

The 50/30/20 rule provides you with a simple budgeting guideline. The more you drill down on it, however, the more gray areas emerge. Use it as a general overview to take your financial pulse each month, and you will find it quite useful

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