The 50 20 30 Rule for budgeting can help you establish great money habits early. Here’s everything you need to know!
The 50 20 30 Rule (or 50/20/30 as it is sometimes referred to) is a simple way of structuring your finances. It’s designed to do three things. That includes allowing you to handle financial obligations, spend within reason, and save money for a rainy day.
Unfortunately, this and other financial literacy items are often not taught in schools. That’s despite the fact that they are some of the most important skills you can have for avoiding unnecessary debt and building a stable financial future. In this article, we seek to fill this educational gap by reviewing one of the best ways out there to become financially literate.
What We Mean When We Say 50
As you probably surmised, each of the numbers in the 50 20 30 Rule stand for one of those three aspects that we discussed. The biggest portion is reserved for your financial obligations. These include your bills, food, and anything else that you need to live on.
In other words, you couldn’t exist in your current lifestyle without them. If you’re bringing in $1000 of take-home pay (after taxes) per month, then that would mean this number should be no more than $500.
When We Say 20
Twenty in the 50 20 30 Rule stands for 20 percent to your savings account. The earlier you can start doing this, the better off you will be and the less you’ll have to save later in life.
Unfortunately, many Americans find themselves having to play catch-up in their 30s, 40s, and 50s. These decades are when earnings start to go up, but it can seem like you’re making more and taking home less when you’re having to put back 30 or even 40 percent of your income to make up for lost time.
Starting at 20 percent will get you used to staying there. Then, as earnings start going up, you can save more without feeling like your newfound salary boost is being cannibalized.
When We Say 30
The 30 part of the 50 20 30 Rule is specifically for your wants. These are the expenditures that you can get by without but that maybe add layers of comfort and joy to your life.
It’s the $5 coffee from Starbucks, the extra coins on your favorite MMO, the books, the nights out with friends. Thirty percent is a reasonable amount to set aside for these things while allowing yourself to be responsible toward your obligations and overall long-term security.
Why 50 20 30 and Not 50 30 20
We’ve already touched on this a little bit, but it bears repeating. The 50 20 30 Rule is designed to let you enjoy life while managing the things that sustain you. It allows you to live in the present and the future. But wouldn’t it be even better with the 50 30 20 Rule, as in you save 30 percent?
Well, not exactly. As you get older, you tend to be less amazed by the world around you. You don’t feel the need to spend as much to try new things and keep up with your friends and acquaintances. A more seasoned mindset develops. This allows you to save more if necessary.
Setting aside a larger amount for your spending as early as you can will help you enjoy more of what life has to offer. But it will do so while ensuring that you build a habit of saving part of everything you earn now.
Five More Rules to Make Any Budgeting Method Work
Now that you’re familiar with the 50 20 30 Rule, it’s time to go one step further. In this section, we’ll be discussing the behavioral rules that will help you abide by 50/20/30 without feeling too much of a strain. Let’s continue.
1. Question What You Buy
Resolve now to never make another impulse purchase for as long as you live. Now that doesn’t mean to stop buying things on short notice. It just means slow down when you’re about to make an impulse purchase, and walk through the steps of questioning the value, if any, that it will bring to your life.
You may not avoid every unnecessary expense in doing this, but you will formulate a valuable habit that can help you spend more mindfully. Use it to really question the purpose of your expenses, and you’ll be well on your way to a happier life.
2. Look For Cheaper Alternatives
Perhaps you can’t talk yourself out of buying that computer you really don’t need. Is there something you can do, however, to mitigate the cost? Perhaps a cheaper alternative with similar specs? Once you’ve made up your mind to make a purchase, your next question should pertain to cost.
Is this the cheapest form of this product available? Is this the cheapest store to buy from? Are there any discount codes available online or in-store promotions? What apps or websites will help me to compare prices? Ask yourself questions like these to further drive down the expense.
3. Establish Emergency Funds ASAP
Living by the 50 20 30 Rule from the outset will allow you to build up an emergency fund over time. Apply this as well to all the “found money” that you fall in to. This can include monetary birthday gifts, graduation money, tax refunds, etc. The more you do it, the easier that fund will build up. Then, you won’t find yourself needing to charge your credit cards and pay high interest rates.
4. Reduce Spending
Take time each day, week, or month to go over all your “wants” purchases. What can you get rid of completely? What is realistic for you given your willpower and proclivities? If you know yourself well enough to know that you won’t cut the expense out entirely, what can you do to shave off a few bucks here and there?
Do this same thing when pursuing your needs as well. That might mean running the air conditioner or heater a degree or two hotter/cooler during the extreme times. It could mean purchasing off-brands. Spending less means taking inventory of what you’re doing and thinking through the ways that you can scale back.
5. Know the Difference Between Wants and Needs
We cannot emphasize this enough. Wants have nothing to do with survival. Needs, on the other hand, do. It’s okay to spend money on both as long as you’re doing it in the right proportions. The 50 20 30 Rule is good for helping you to be responsible for this.
The 50 20 30 Rule Will Set You Up For Success
The 50 20 30 Rule is not the only budgeting option out there. Try it and see how it works for you. If it doesn’t, however, don’t give up on fiscal responsibility. You’re at an important time in your life where you can prevent yourself from making bad spending decisions that will follow you for years to come. A system will help you avoid making those mistakes. Good luck as you find your way!
Aric Mitchell's work appears regularly here at 4tests.com and across the web for sites, such as The Inquisitr and Life'd. A former high school teacher, his passion for education has only intensified since leaving the classroom. At 4tests, he hopes to continue passing along words of encouragement and study tips to ensure you leave school ready to face an ever-changing world.
