Nobody ever conquered their personal finances without a budgeting rule in place. Budgeting isn’t just for people who want to feel in control of their monthly income but it can certainly help you evaluate your spendings and savings.
In the influencer space, fluctuating incomes and uncertainty is all the more reason YOU need a budget rule set in place immediately. From saving for rainy days to figuring out your mortgage debt payments, the 50/30/20 rule is a great stepping stone!
What is the 50/30/20 budget rule?
The 50/30/20 rule is a simple ratio-based budget that divides your money into 3 categories:
- 50% for needs,
- 30% for wants, and
- 20% for savings.
Let’s dive into each category in a bit more detail now.
Needs: 50%
Half of your budget is allocated to your monthly needs. These are expenses that can’t be delayed and are absolutely necessary for living. The rule for recognizing needs is simple: can you live without it?
If the answer is no, then it counts as a need.
Here are some examples of needs:
- Groceries
- Utility bills
- Rent or mortgage payment
- Loan repayment
- Fuel
- Pet costs
- Childcare
Wants: 30%
Wants are spendings that improve your quality of life and often count as self-care spendings. There are many ways to recognize your wants:
- Hobby costs such as gym memberships
- Shopping for clothing or self-care products
- Planned vacations
- Eating out at rsetaurants
- Entertainment costs such as streaming subscriptions or cinema trips.
- Gifting your loved ones
Savings: 20%
Last but not the least, the 50/30/20 rule is meant to increase your saving as much as possible. Here are some aspects that count as saving:
- Retirement plan payments such as 401(k),
- Keeping emergency funds seperately
- Keeping savings in a seperate account for interest earnings
How to calculate the 50/30/20 rule?
The 50/30/20 rule applies to your net income, also known as your take-home pay. You can find your net income by subtracting taxes, expenses and interest from your total income. You can find your total income by multiplying your monthly paycheck by 12!
Once you have your net income, you’ll divide that by 12 to determine your monthly rate. Then, you’ll apply the 50/30/20 ratio on the answer you got!
Luckily, there are many budgeting apps and budget calculators online that can give you the exact budget amount within seconds!
Does the 50/30/20 rule work?
The 50/30/20 rule can be a great beginner-friendly budget rule to help you get started in personal finance. But whether it works or not depends on your individual case.
For some people, the rule may not suffice for those who live in expensive areas or have low incomes. For instance, if you earn $1000 a month with a rent of $600, you’re already way out of line for this rule to apply to you!
Is the 50/30/20 rule realistic?
Even though the 50/30/20 rule is a good rule of thumb to convert your monthly income into a monthly budget, experts suggest that it’s not the most realistic budgeting rule after all.
Stanton Financial Co.’s Founder Azja Stanton comments, “This budget isn’t personalized to your lifestyle, values, or money goals. But it does put down an okay foundation to budget your paycheck.”
Now the question is how the 50/30/20 rule is a good rule of thumb for budgeting…
Why is the 50/30/20 rule good?
There are many benefits of using the 50/30/20 rule to spend your money in a budgeted way.
Doesn’t require tracking
Many budgeting methods require you to track your spending habits with too many categories. And so, those of us who don’t like doing the math of our savings or debts end up forsaking the practice of budgeting our monthly expenses!
But with the 50/30/20 rule, you aren’t formulating a detailed budget that’s impossible to track. Instead, you’re using a percentage-based budget to help you set a portion of your budget for three categories of spending.
Shows you what you can afford
Knowing how to allocate the money in your bank account each month can give a clear financial image of your spending. Once you jot down your household budget against your net income, you find out if you can take additional debt or pay off the current one quicker!
It also helps you figure out if you can afford that Birkins bag in your bookmarks this month…
Helps you generate an emergency fund
Rainy days don’t call before they come. However, the 50/30/20 rule can help you create an emergency fund to deal with any unpredictable expenses down the road. Saving for the future as a part of your budget is perhaps the most important benefit to yield.
So the next time you come across flat tires or an urgent doctor’s visit, you can easily spend money from your savings!
Serves as a simple budgeting method
One of the main reasons people tend to use the 50/30/20 rule is because how simple it is for beginners. You manage your money and figure out your savings and debt easily while saving for retirement too.
No rocket science involved!
Other budgeting methods
Apart from the 50/30/20 rule, there are many different budgeting systems you can use to plan your budget according to. Here are 4 other ways to plan your budget around your monthly income:
Zero based budgeting
Zero-based budgeting requires you to allocate every dollar of your income to a specific category, ensuring that your income minus expenses equals zero.
This means you give each dollar a job, whether it’s for necessities, savings, debt repayment, or discretionary spending.
Envelope system
The envelope system is a cash-based budgeting method. You allocate specific amounts of cash to different spending categories (e.g., groceries, dining out, entertainment) and put the cash in separate envelopes.
Once an envelope is empty, you stop spending in that category until the next budgeting period. But it’s quite easy to open an envelope and cheat your way through this budget rule.
Pay yourself first
The “Pay Yourself First” method emphasizes saving and investing as a priority. When you receive your income, set aside a predetermined percentage for savings and investments before allocating funds for other expenses.
By prioritizing savings, you ensure that you are building wealth and securing your financial future.
60% solution
The 60% Solution is a budgeting method that suggests dividing your after-tax income into three categories:
- 60% for committed expenses (needs),
- 10% for retirement savings, and
- 30% for lifestyle choices (wants).
Achieve your financial goals with the 50/30/20 budget rule
Without a financial plan, there is no financial success. And without a budget, there is no financial plan.
If you want to achieve your financial goals, you’ll have to look into the best ways to budget your monthly after-tax income, so you’re spending responsibly and building your savings and debt repayment methods with 100% control.
And in this blog post, I’ve spilled everything there is to know about the 50/30/20 budgeting rule.
De-stress Financially With Stanton Financial Co.
If you want to dive head over heels into being the creative mastermind of your brand, Stanton Financial Co. can help you.
Stanton Financial Co. is a premium bookkeeping and CFO service that brings big business strategies to small businesses, solopreneurs, influencers, and content creators.
Unlike most bookkeeping services, we make it easy for you to profitably manage your fluctuating income. Collaborate with brands and focus on doing what you do best– we’ll take care of everything else!
