The 50/30/20 rule of budgeting divides your income into three categories for spending purposes: needs, wants, and savings. The rule states that you should spend 50% of your after-tax income on needs, 30% on wants, and save the remaining 20%. In other words, under this rule, you spend 80% of your after-tax income and save 20% of it. The budget is simple to create and easy to follow, covering all the three essential facets of an individual’s financial life.
Let’s get into the details of the 50/30/20 budgeting rule:
Needs, Wants, and Savings
Needs are those expenses that are considered basic necessities and you can’t live without spending on them. For example, food, healthcare, utilities, and transportation come under the category of needs as spending on them is indispensable.
In budgeting, wants are those expenses that are not considered necessities but make your life easy and comfortable. For example, eating out at a restaurant, watching movies at a theatre, and buying the latest gadgets fall under the category of wants.
Savings, as the name suggests, is the leftover portion of income after spending on different categories of expenses. The rule suggests saving 20% of your after-tax income after spending 80% of it on expenses (50% on needs and 30% on wants). You can contribute your savings to your emergency fund, sinking fund, or retirement fund.
Benefits of the 50/30/20 budgeting
Here are some of the notable benefits of 50/30/20 budgeting:
1- Financial Discipline
Like any other budget, the 50/30/20 budget sets spending thresholds for “needs” and “wants”, allowing you to remain within your spending limits and achieve your desired savings goals. If you breach the threshold for any category of expense, you can quickly identify it and work on it to curtail your expenditures in the next month. This makes you financially disciplined and takes you closer to your financial goals with every passing month.
2- Flexibility
The 50/30/20 budgeting gives you flexibility regarding your spending. You aren’t restricted to spending your money just on your needs as you are allowed to spend up to 30% on your wants. This keeps you motivated and also gives you plenty of leeway in spending your money without sacrificing your wants.
3- Easy-to-follow Approach
The budget is extremely simple to make and easy to follow as it doesn’t involve complex calculations. You can prepare a simplified yet effective budget by remaining within the set 50-30-20% spending thresholds.
Conclusion
If the thought of budgeting inculcates fear of complex and lengthy calculations in your mind, you should follow the simple 50/30/20 budgeting technique. In simplest terms, all you have to do is to save 20% of your after-tax income, which should keep you on track to achieve financial wellness. Once you learn to adopt this simple 50/30/20 budgeting technique, you can take on other budgeting methods to manage and improve your finances.
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