You should follow the 50/30/20 rule to manage your budget well
The 50/30/20 budgeting rule is beautiful in its simplicity. It can help you divide your income into categories that make income management very simple. Budgeting doesn't have to be complicated, and it doesn't have to take up hours of your day. In fact, the best ways to budget are often the simplest. Take, for example, the 50/30/20 rule.
The 50/30/20 rule is a straightforward monthly budgeting method that tells you exactly how much you should put toward your savings and living costs each month.
With a clear, big-picture overview of your budget for the month, you can confidently avoid overspending and build your savings over time – all without having to record every individual transaction.
So, if you've ever downloaded a budget app and just abandoned it, you might want to try the 50/30/20 method. It's one of the best budgeting tips we've found, and here's how it works.
What is the 50/30/20 rule?
The 50/30/20 rule is an easy budgeting method that can help you manage your money effectively, simply, and sustainably. The rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for saving or paying off debt.
By regularly keeping your expenses balanced across these key spending areas, you can put your money to work more efficiently. And with only three main categories to keep track of, you can save time and stress digging into details every time you spend.
One of the questions we hear a lot when it comes to budgeting is, “Why can’t I save more?” The 50/30/20 rule is a great way to solve this age-old conundrum and build more structure into your spending habits. It can make it easier to reach your financial goals.
The origin of the 50/30/20 rule?
The 50/30/20 rule originated from the 2005 book, “ All Your Worth: The Ultimate Lifetime Money Plan ,” written by current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi.
Pointing to more than 20 years of research, Warren and Tyagi conclude that you don't need a complicated budget to examine your finances. All you have to do is balance your money across your needs, wants, and savings goals using the 50/30/20 rule.
How do you budget your money with the 50/30/20 rule ?
The 50/30/20 rule simplifies budgeting by dividing after-tax income into just three spending categories: needs, wants, and savings or debt.
Knowing exactly how much to spend on each category will make it easier to stick to your budget, and help keep your spending in check. Here's what a budget that sticks to the 50/30/20 rule looks like:
Spend 50% of your money on needs
Simply put, wants are expenses you can't avoid—payments for all the necessities that are difficult to live without. 50% of your after-tax income should cover most necessary costs.
Needs may include:
- The monthly rent
- Electricity and gas bills
- communications
- Insurances (for health care, car, or pets)
- Minimum loan repayment installments
- Basic groceries
For example, if your monthly income after taxes is 2,000 euros, then 1,000 euros should be allocated to your needs.
This budget may vary from person to person. If you find that your needs add up to more than 50% of your take-home income, you may be able to make some changes to cut these expenses a little. This could be as simple as switching to a different power provider, or finding new ways to save money while grocery shopping. It may also mean deeper life changes, such as seeking a less expensive living situation.
Spend 30% of your money on desires
Since 50% of your after-tax income takes care of your basic needs, 30% of your after-tax income can be used to cover your needs. Wants are defined as non-essential expenses — things you choose to spend your money on, even though you could live without them if you had to.
These may include:
- Eating out
- Shopping for clothes
- Holidays
- Gym membership
- Entertainment subscriptions (Netflix, HBO, Amazon Prime)
- Groceries (other than essentials)
Using the same example as above, if your monthly income after taxes is €2,000, you can spend €600 on your needs. And if you find that you are spending too much on your needs, it is worth considering which of these you can cut back on.
As a side note, following the 50/30/20 rule doesn't mean you can't enjoy your life. It simply means being more conscious of your money by finding areas in your budget where you are spending too much unnecessarily. If you're confused about whether something is a need or a need, simply ask yourself, "Can I live without this?" If yes, then it is likely needed.
Store 20% of your money for savings
With 50% of your monthly income allocated to your needs and 30% allocated to your needs, the remaining 20% can be allocated to achieving your savings goals, or paying off any outstanding debts. Although the minimum payment is considered needs, any additional payments reduce your current debt and future interest, so they are classified as savings.
Consistently setting aside 20% of your paycheck each month can help you build a better, more permanent savings plan. This is true whether your ultimate goal is to build an emergency fund, develop a long-term personal financial plan, or even prepare for a down payment on a house.
It is impressive how quickly savings add up. If you bring home €2,000 after tax each month, you can put €400 towards your savings goals. In just one year, you will save approximately 5,000 euros.
How to Apply the 50/30/20 Rule: A Step-by-Step Guide
So, how do you use the 50/30/20 rule? To put this simple budgeting rule into practice, you'll have to calculate a 50/30/20 ratio based on your income and spending breakdown. Here's how:
1. Calculate your income after deducting taxes
The first step to using the 50/30/20 budgeting rule is to calculate after-tax income. If you freelance, your after-tax income will be what you earn in the month, minus your business expenses and the amount you have set aside for taxes.
If you are a fixed-salary employee, this will be easier. Take a look at your payment receipt to see how much is in your bank account each month. If your paycheck automatically deducts payments such as health insurance or retirement funds, add them back.
2. Categorize your spending for the past month
To get a true picture of where your money is going each month, you'll need to know how and where you spent your income over the past month. Get a copy of your bank statement for the last 30 days, or simply use the Insights feature in your N26 app. It automatically sorts all your transactions into categories like Salary, Food, Grocery, Entertainment, Entertainment, and more.
Now, divide all your expenses into three categories: needs, wants, and savings. Remember, a need is a basic expense that you cannot live without, such as rent. Wanting is an extra luxury you can live without, like eating out. Savings are additional debt payments, retirement contributions to a pension fund, or money you save for a rainy day.
3. Evaluate and adjust your spending to comply with the 50/30/20 rule
Now that you can see how much of your money goes toward your needs, wants, and savings each month, you can start adjusting your budget to align with the 50/30/20 rule. The best way to do this is to evaluate how much you spend on your desires each month.
According to the 50/30/20 rule, need isn't extravagant — it's basic kindness that allows you to enjoy life. Since downsizing your needs can be a complex and difficult task, it is best to determine which of your needs you can downsize to stay within 30% of your take-home income. The less you spend on your needs, the more likely you are to be able to meet your 20% savings goal.
50/30/20 spreadsheet.
While our 50/30/20 rule calculator can provide a general overview of the ideal 50/30/20 rule budget, our 50/30/20 rule spreadsheet is a good option if you want to create a more in-depth budget.
Spreadsheet programs like Microsoft Excel, Google Sheets, and Apple Numbers offer pre-made templates to make help spreadsheet budgeting easier. You can find plenty of free 50/30/20 rules spreadsheets online that are compatible with any software you use.
Make the 50/30/20 rule automatic
Budgeting techniques can help you feel more secure and in control of your financial picture. But it also helps to have financial tools that can help you along the way. It helps you reach your budget goals effortlessly. Access your money from anywhere with your 100% mobile banking account, and get instant notifications for an up-to-date picture of your finances.
