Are you feeling financial stress or, even worse, dealing with debt? Maybe it’s time to try a new approach to your financial life.
Imagine dividing your income into three simple categories: 50% for essentials, 20% for savings and debt repayment, and 30% for personal spending.
This is the 50/20/30 savings method. It’s straightforward and effective for managing your money. But more than that, it’s a lifestyle choice.
And it’s a budgeting strategy that might change your life. Sounds simple enough. But is it effective? Let’s break down each of the bucket’s methods.
50% Essentials Spending
These are the bills that you absolutely must pay and the things necessary for survival. These are things like rent or mortgage, utilities, groceries, transportation, and insurance. They’re the things that you can’t live without or that would affect your quality of life if you cut them.
If you’re spending more than 50% on your needs, then you’ll need to either cut down on your personal spending or try to downsize your lifestyle. For instance, you can downsize to a smaller home or a more modest car.
If remote work is an option for you, you may even consider moving to a cheaper and lower-tax state.
20% Savings and Debt Repayment
Allocate 20% of your net income to savings and investments. As a rule of thumb, you should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on your retirement savings and your long-term financial goals.
You can use this money to make contributions to an IRA account or invest in a portfolio of stocks or ETFs.
Or this could go towards funding the down payment for your home. If you find that saving 20% of your income is too hard, work on increasing your income. There are endless ways to boost income, such as by asking for a raise, finding a side hustle, or developing new skills.
30% Wants Spending
Wants spending are all the things you spend money on that are not absolutely essential. Wants spending is the money that you spend on things that make you happy, such as hobbies, entertainment, travel, dining out, or shopping. These are the expenses that you can live without but that add value to your life.
This is your fun money—the cash you can spend on whatever you want, guilt-free. But if you’re spending more than 30% of your income in this bucket, you’ll need to prioritize what matters most to you and cut back on unnecessary pleasure items.
For instance, you can work out at home instead of going to the gym, prepare meals at home rather than dining out, or enjoy a movie on Netflix instead of going to the cinema.
Automate Your Savings
By automating your savings process, you’ll make saving easier.
Set up monthly automated payments from your checking account to your investment or savings accounts. This guarantees that your funds will increase steadily without effort.
You can read about how to become an automatic millionaire here.
Modifying the 50/30/20
If the percentages in the 50/30/20 method don’t fit your needs, you can just adjust the percentages.
This could be relevant for people living in a high-cost city or for people who have higher long-term retirement savings goals.
Final Thoughts
The 50/20/30 savings rule is a flexible, easy-to-follow method that can help you manage your money and strike the perfect balance between your needs, wants, and goals.
Is the 50/20/30 rule effective?
Absolutely. If done right, you can live within your means, save for the future, and still enjoy the present. You may also get something money can’t buy — peace of mind.
