Updated: Jul 22, 2018
A popular budgeting route is to live by the 50/20/30 Rule. Budgeting expert, Nathan Lippincott, shares how the 50/20/30 Rules works and how you can use it with ANY income.
The 50/20/30 Rule is a different way to look at your budget or lifestyle. Maybe you don’t really want to do an actual budget, or maybe you spend less than you make without difficulty. When you apply the 50/20/30 Rule, 50 percent of your income will go to essentials, 20 percent to savings and 30 to your personal spending category.
One great thing about this rule is that you do not need any particular income to follow it; anyone can do it with whatever salary they currently make. Since it is a percentage-based system, the same proportions apply whether you are earning an entry level salary and living in a studio apartment or you are years into your career and preparing to purchase your first home. A closer look at each of these categories will help in understanding how this works.
Essentials will take up 50 percent of your income
50% may sound like quite a lot, but once you realize what this category encompasses, it will make sense. In general, these “essential” expenses are nearly the same for everyone and include housing, food, transportation costs and utility bills. By applying the percentage rule, you can adjust this figure while still maintaining a sound, balanced budget. The goal then becomes a focus on the total sum rather than individual costs per category. For example, some people may live in a high-rent area but walk to work, while others enjoy much lower housing costs with higher transportation needs – yet both will meet the 50% overall budgetary goal by adjusting each element accordingly.
20 percent of your income should go to savings
This is the category for your emergency fund, general savings account, and retirement. This is the “get ahead” category. Whereas 50 percent (or less) of your income is the goal for essentials, 20 percent (or more!) should be your goal as far as obligations are concerned. You will pay off debt quicker and make more significant strides towards a frustration free future by devoting as much of your income as you can to this category.
30 percent then goes to your personal spending category
This would include things like cell phone, cable tv, Netflix, eating out – basically anything that does not fit the description of a necessity or bill. This way, you will know exactly how much money you can spend on “fun.” The fewer items you have in this category, the more progress you will make paying off debt and securing your future, of course – but don’t forget to include some things here so life isn’t all work and no rest and relaxation!
50/20/30 When you have debt
Application of the 50/20/30 Rule while paying off debt can be a little different and requires some adaptation to the overall percentage breakdown. Debt repayment can be considered an essential, as it is a bill that must be paid each month. However, depending upon the amount of the debt, this may stretch your 50 percent bracket a bit too tight, in which case you will need to adjust the percentages slightly to meet your needs. Perhaps your rule will be 60/20/20 for awhile, or 60/15/25. All of these options are possible and doable. The object is to have a plan and stick to it.
Why It Works
The 50/20/30 Rule is a much shorter approach to a budget and works well for those who may not be the type to do an entire spreadsheet or budget form. I will provide a note of caution, though; try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else’s. What this plan does is provide a framework for you to work within. It can and should be as personalized as possible but with flexibility and recognition that everyone’s life circumstances are different.
Once you review your income and expenses and determine what is essential and what is not, only then you can create a system of any kind to help you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.