Use The 50/30/20 Rule To Help You Budget Your Money
Budgeting is very important when it comes to our personal finances; Allocating our income into different sections of our expenses will help us better manage our money base on our lifestyle. Budgeting our income will allow us to pinpoint which expenses are inflated and which expenses need more attention. Consider using the 50/30/20 Rule of Budgeting if you’re looking into budgeting your income, but don’t know where to start!
The 50/30/20 rule is from the book “All Your Worth: The Ultimate Lifetime Money Plan”. This budgeting method recommends dispersing your “after-tax” income into three parts with 50% for necessities, 30% for wants, and 20% for savings.
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50% of your after-tax income is dedicated to pure necessities. These are the things that are required in order for you to stay alive. Everyone incurs these types of expenses no matter where you live and what you do for a living. Some expenses that fall under this category are housing/rent, food, groceries, transportation, insurance, healthcare, and utilities.
The 50/30/20 rule allocates a reasonable amount to your pure necessities. If 50% of your income is not enough to cover for the necessities then you need to downsize your expenses because your current income is not enough to support your lifestyle. If downsizing isn’t an option then steal some of the percentage allocations from your “wants”, NOT your “savings”.
For example: If you are struggling to budget 50% of your income to necessities because you live in downtown, Vancouver (fyi, it’s hecking expensive) and you drive in order to get around the city then you should either
- Continue driving, but live outside of the chaotic streets of downtown, Vancouver
- Continue living in the downtown area, but take public transportation to get around
30% of your after-tax income is allocated to your wants. These are the things that you don’t necessarily need in your life, but you want it just for shits and giggles. Everyone should be able to live their life to it’s fullest without having to penny pinch everything they get their hands on. The 50/30/20 rule allows you to use 30% of your income to be used on the things to help keep your sanity.
Some examples would be to dine out, travel, movies and entertainment, tattoos, amusement parks, night out with the bois… etc.
The last 20% of your income is left for savings. This category includes investing, emergency fund, and even debt repayment. No matter how old you are, you should always allocate 20% of your income into savings because there will be moments in your life where you will need quick cash for an emergency.
You should always have an emergency fund ready and pay off any debts that you owe. Once you’ve completed these milestones then you can finally start using 20% of your income for investing. Whether it’s investing in the stock market, real estate, business, or side-hustle, you should be investing consistently to help you achieve financial independence through the power of time and compounding.
50/30/20 Rule of Budgeting
The 50/30/20 Rule is a budgeting method that is great for anyone who needs a guideline on how to properly budget their after-tax income. The budgeting percentages are 50% for necessities, 30% for want, and 20% for savings.
Everyone lives a different lifestyle compared to everyone else; No one is going to have exactly the same expenses and interests, so adjust these percentages accordingly to fit your lifestyle and living conditions. The 50/30/20 is just a rough guideline to help you start budgeting your money.
What do I think about the 50/30/20 rule of budgeting? (This is just my opinion)
I like how this method allocates half of your income for your wants and savings because it’s very important to live your life to it’s fullest while still maintaining 20% for savings. Don’t live your life working pay cheque to pay cheque, live a reasonable lifestyle to where you can still save some money aside for rainy day funds.
My only concerns with this budgeting method are
- The percentage allocations are based on your after-tax income. That means with every wage increase you get, this inflates the allowable expenses for each category. This may entice individuals to inflate their lifestyle and to spend more on unnecessary expenses. If you are able to live comfortably with your old wage then use the increase for investing, saving, or paying debt.
- Confusing necessities with wants. Use your best judgement to differentiate the two.
- Purchasing groceries to eat is a necessity, but dining out for a three-course meal is a want.
- Driving an exotic car is a want, driving any other affordable car is a necessity.
- Living in an apartment is a need, but a mansion with a man cave, 16 washrooms, and a tiger in the backyard is a want.
- Allocating 20% of your income to debt repayment may lead you to pay a lot of interest. Don’t get me wrong, paying 20% is better than paying 19% (Groot Reference), but if you have numerous amounts of debt then pull some of those percentages out of the “wants” category until you’re able to pay all of them off.
This is my blog post to the 50/30/20 Rule. I hope you found this helpful and let me know down in the comment section below what you think! Have you tried the 50/30/20 rule of budgeting? and did it help?