Budgeting is something that a lot of us can benefit from and would do wonders for our finances. However, it can seem pretty overwhelming and intimidating. There are so many different budgeting methods and techniques, that it's difficult to know just where to start. When I first began budgeting (or trying to) I felt overwhelmed with the amount of different budgeting methods I could try. However, one of them did stand out to me and seemed like a great starting point, the 50/30/20 rule.
50/30/20 Rule
The 50/30/20 rule is an easy set of guidelines to effectively distribute your budget into 3 categories. The three categories are your needs, your wants and your savings. With this rule, 50% of your budget will be allocated towards “needs”, 30% will be allocated towards “wants” and 20% will be towards “savings”. The 50/30/20 budget rule is a great way to dip your toes into budgeting because it is a very simple idea and it introduces you to understanding where your money is going, without it being too overwhelming. All you need to know in order to get started is your monthly take home pay.
Now that you have calculated your monthly take home pay, you will allocate 50% of that towards your wants. In order to calculate this amount, simply multiply your take home pay by 0.50, your total is the amount that should be allocated towards your monthly needs. Needs can also be described as essentials, the things that you simply can’t live without. Your monthly rent expense, your grocery bills and your utility bills are just some of the expenses that can be classified as needs.
You will then calculate the amount that you will allocate towards your wants. This time, you will multiply your monthly take home pay by 0.30, your total is the amount that you should allocate for your wants. Your wants can be described as items or services that you desire but you don't necessarily need in order to live. Eating out, shopping trips, and vacations are just some of the many different wants you may have.
Finally, you will calculate the amount that will be allocated towards your savings or paying off debt. You will multiply your monthly take home pay by 0.20, the total will be the amount you should allocate for your savings or for paying off debt. This money can go towards any type of savings, whether it be a retirement fund or saving up for a house or a car. This amount can also be used to pay off any debt you may have, that could be student loans, auto loans or simply your credit card bills!
Pros & Cons
As demonstrated, this rule is very simple and there really isn't much to it. However, as with any other budgeting technique, there are some pros and cons to it.
A major pro is that this rule is very flexible. You simply have to allocate a portion of your pay towards one of the three categories and from there, you can truly spend your money however you’d like. This rule is also very realistic, it allows you to set aside enough money to indulge in little pleasure or desires that one might have.
As for cons, this rule might not be suitable for every level of income and personal circumstances. You might also think that allocating 30% towards your wants might be too much and lead to overspending. You can however, switch your percentages around and allocate 30% towards savings and only 20% towards wants. A final downside to this rule is that it serves as an introduction to budgeting, it allows you to allocate money towards three different sectors but it doesn't do much when helping you understand exactly when and where you are spending your money.
It’s Worth a Try
As I mentioned, this rule might not work for everyone but it might also be a great starting point for others. As a college student with a part time job, trying to figure out a suitable budget, this rule was a great starting point for me. After a couple months of abiding by this rule, I have expanded and implemented other techniques such as the zero based budget, which allow me to track exactly where my money is going. This rule definitely is worth a try and will hopefully help you start budgeting!
Author:
Melissa Rodriguez
Bobcat Financial Coach
Melissa is a Bobcat Financial Coach alumna at the University of California, Merced. Read more about her here!
