{"id":8291,"date":"2023-08-05T19:07:22","date_gmt":"2023-08-05T19:07:22","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/savings\/what-is-the-50-20-30-rule\/"},"modified":"2023-08-05T19:07:22","modified_gmt":"2023-08-05T19:07:22","slug":"what-is-the-50-20-30-rule","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=8291","title":{"rendered":"What is the 50-20-30 Rule?"},"content":{"rendered":"
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The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our \u201cmonthly jargon\u201d articles that focus on debunking financial terms that are often used sans explanation. This month, we are focusing on a budgeting term that can help you set spending limits and savings targets, especially as you consider reflecting on your finances mid-year: the 50-20-30 Rule. <\/span><\/p>\n

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What Does 50-20-30 Mean?<\/span><\/strong><\/span><\/p>\n

The 50-20-30 Rule is a budget guideline that functions to help you work towards your financial goals via an easy-to-follow, intuitive way to allocate your spending: 50% should be put towards your needs, 20% should go towards your savings goals, and 30% should be used for your wants. These percentages apply to your after-tax income. This rule functions as a template to help individuals manage their money and take charge of their finances and financial life, especially when it comes to saving for retirement and maintaining an emergency fund. <\/span><\/p>\n

50% for Your Needs<\/span><\/strong><\/span><\/p>\n

This category is intended for the essentials in your life \u2013 the bills you absolutely must pay and the necessities you and any dependents need for daily living. Think rent or mortgage payments, utilities, groceries, car payments, insurance premiums, health care costs, and any monthly debt payments. Gas is often also included in this needs category; however, it can be viewed as a want depending on your lifestyle and where you live. In other words, if you have easy access to public transportation like the D.C. Metro or your city equivalent, driving and gas costs should be one of the last costs you include in your needs category. If you hit your 50% allotment before you cover your car expenses, push the gas into the wants category for that month. Keep in mind that this rule has been thoroughly evaluated and piloted, and 50% or half of your after-tax income each month should be sufficient to cover your monthly needs. If you are consistently exceeding this category and find there is no way to reallocate your finances given your current lifestyle, consider making a change that would have a big impact like downsizing your apartment to have a lighter rent burden or even selling your car if you live in the city and find yourself rarely using it. <\/span><\/p>\n

20% for Your Savings<\/span><\/strong><\/span><\/p>\n

This is arguably the most important category out of the three, keeping in mind that you may be able to trim down on your needs if it means being able to put an adequate amount towards your savings. At first, this 20% range may seem a little high if you have exclusively been viewing your savings as retirement savings; however, this savings category also involves an emergency fund and maintaining a cash balance in your local savings account \u2013 at a level that you feel comfortable with and that brings you peace of mind \u2013 on top of the money you are contributing towards your retirement accounts. Most companies have auto-contributions for an employer-sponsored retirement plan, and if you do not have the auto-contribution turned on, that is the easiest step you can take towards being successful in this category. In terms of an emergency fund, you should aim for an amount that can cover you for a minimum of three months, and, remember, if and when you tap into this fund, make sure you prioritize replenishing it. <\/span><\/p>\n

30% for Your Wants<\/span><\/strong><\/span><\/p>\n

This category can be viewed as your leftover funds for the costs and purchases that you can ultimately live without but that bring you enjoyment to have. This bracket includes eating or ordering out, happy hours with friends, vacations, new electronic devices, workout classes and gym memberships, concert and sporting event tickets, etc. To put this category into perspective, these costs will always be items you can skip and live without, and these costs are the lowest in priority in the 50-20-30 budgeting rule for a reason. It is prudent to never put funds towards this category before first addressing your essential, required costs and your savings allocations. With that in mind, this category can also have different levels within it; for example, you may not need to completely cut out hitting up your favorite restaurant but may simply need to reevaluate your order \u2013 e.g., maybe skip the pricey steak at times \u2013 to keep it within a reasonable range for your budget. <\/span><\/p>\n

Applying this Rule to Your Financial Life<\/span><\/strong><\/span><\/p>\n

How much you contribute towards your short-term and long-term financial savings goals, and how regularly you do so, is a crucial determinant of your financial success. It can be challenging to have savings goals but a lack of framework to model your saving on. In the absence of strategy, goals can be put on the backburner and neglected, or maybe you are giving your savings goals adequate attention but are not sure how much you should be targeting when it comes to saving, leaving you below or on the short-end of your target range. <\/span><\/p>\n

There is a reason this strategy is called the \u201c50-20-30 Rule\u201d and not the \u201c50-30-20 Rule\u201d to keep the numbers in properly descending order. The percentages are listed according to how you should prioritize them; the 20 is in the middle because your savings goals should be prioritized over your wants. If you find yourself feeling tempted to reallocate funds among these categories, the 20% category is not the one to touch. If anything, contribute more to this section if and when you find yourself with the flexibility to do so. <\/span><\/p>\n

If you have any money left over from the 50% needs category, put it towards the category that is next in line in the rule title: the 20% savings category. Do your best to refrain from putting excess funds towards your wants category; that being said, there can be minor exceptions to this rule if there is a unique larger purchase that falls under your wants category on a special occasion. The biggest thing to keep in mind is to aim to never sacrifice your savings and needs for your wants. \u00a0<\/span><\/p>\n

Final Points<\/span><\/strong><\/span><\/p>\n

Remember that this rule has been tested and proven effective. If you find yourself continuously exceeding either the 50% or 30% thresholds for needs and wants, respectively, it is vital you take some time to look at your spending habits and budget and determine where you can cut back and readjust your finances. Your biggest goal should be to never short yourself in the 20% savings category, and if you find yourself having trouble prioritizing this category, consider putting it first in your mind and adopting more of a 20-50-30 Rule \u2013 your future self will thank you.<\/span><\/p>\n<\/div>\n