Financial Education

The 50/30/20 budget rule: how to make the most of your money

Know a simple rule to get your monthly budget in order in a few minutes without cutting your spending on fun and saving. Understand the 50/30/20 budget rule!

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Take control of your finances with the 50/30/20 budget rule

Whiteboard written 50/30/20 budget rule
Setting up a budget doesn’t have to be difficult. Discover the full power of the 50/30/20 budget rule. Source: Flicker

In fact, controlling your finances doesn’t have to be difficult, let alone work. In fact, after the 50/30/20 budget rule was invented, it became difficult to find excuses not to manage your money.

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If you don’t know this rule or aren’t sure how to practice it, read this article. So, let’s teach you everything you need to know about this method!

What is the 50/30/20 budget rule?

50, 30, and 20 are not a combination to play the lottery. However, if used correctly, they can generate a lot of money.

In fact, the 50/30/20 budget rule is based on a very simple principle: Divide your expenses into large groups. However, that is not all.

This method sets portions of your budget for necessity, fun, and savings. According to this rule, 50% of your budget should be used for common expenses.

30% is the monthly installment that you can use to spend on fun and things that aren’t, shall we say, “vital”. The remaining 20% ​​goes to savings.

Thus, for example, they must be saved to compose your emergency fund. These percentages should be calculated according to your monthly income/salary.

In fact, this budget is very useful as it gives a clear destination on how to act with your money before receiving it.

By forecasting entertainment expenses, you already avoid the most common mistake of most budgets.

After all, at some point, you will use your money to have fun. However, if this fun isn’t calculated, you could have trouble paying your other bills that month and the next few months.

However, what expenses should I put in the “needs” category? What is “entertainment” really? Understand below!

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50% – Needs

50% of your salary must be spent on living expenses. Among these, we can include house and food expenses, for example. Below, we will leave a list of expenses that must be in this category:

  • Rent, mortgage, condominium; groceries;
  • Utilities (water and electricity bills, among others);
  • Health plan;
  • Transport;
  • Loan installments and credit card balance;
  • Child care.

It is important that you enter only the monthly recurring expenses in this section. Unexpected expenses such as car maintenance and house repairs should mainly be covered by the emergency fund.

30% – Wants

In fact, under the 50/30/20 budget rule, 30% is the monthly budget you have to spend on fun. Thus, this percentage should be used for expenses that are not necessary.

For example, you can live without going to your favorite singer’s concert or going out to dinner. Some more radical savers may think: “it would be better to put that money in savings”.

Having fun is also an important part of your social life and mental health. Therefore, you cannot neglect or simply set aside.

Many people create budgets that don’t include entertainment expenses and fail to stick to them. So don’t fall for that mistake. Use that money without guilt or pangs of conscience.

The following is a list of some items that should be in this category:

  • Hobbies;
  • Dining out;
  • Vacation;
  • Gym fees or expenses for any sports practice;
  • Cinema and concert tickets;
  • Streaming subscriptions, cable TV, and other leisure services are paid monthly;
  • Clothing for special events (suits, party dresses);
  • Non-essential services (haircut, beauty services, and others).

You must question each of the expenses you have placed in this category. “Do I need all these streaming services?” It’s a good question to start with.

You will certainly find good opportunities to save without losing quality in your leisure time.

20% – Savings

Do you know what to do with the remaining 20% of your budget? Anything! This is the part you save, leaving in savings, for example. With that amount, set up an emergency fund.

Thus, it must be stored in an account you can easily and instantly withdraw when needed. You can use a portion of this amount to start investing in your retirement.

After setting up your emergency reserve, you can study some assets to invest.

How to use the 50/30/20 budget rule?

People on roller coaster having fun
Understand how it is possible to have fun without “breaking” your budget. Source: Pixabay

Here’s a simple step-by-step guide to implementing the 50/30/20 budget rule in your budget!

Calculate your monthly income

Add up all your monthly earnings (salary, earnings, government aid, and more).

Calculate spending limit

Calculate the percentages that define the limit you should spend in each category in a spreadsheet or on paper. If you have difficulties with calculating percentages, do the following calculations.

Multiply your total income by 0.5 and write down that amount. Then multiply your same total income again by 0.3 and 0.2 separately. Write down these two values.

These are the “ceiling” of each spending category.

Set expenses

Now, set the expenses of each category for the next month, respecting the defined limit.

Follow your budget

Review your budget before the start of each month and make any necessary changes to stay within your spending limit as much as possible.

In fact, it will be much easier to keep track of your accounts if you can describe them before the start of each month.

Is the 50/30/20 budget rule the best option for your finances?

Calculating budget: calculator, pen and sheet
Unfortunately, not everyone can use the 50/30/20 budget rule. Understand. Source: Pixabay

In fact, the 50/30/20 budget rule is one of the simplest ways to control spending. In addition to helping you manage your accounts, they can serve as a basis for making decisions involving your money.

You may have found a super promotion, but if this one takes you out of the 50/30/20 watering, it’s not worth it. However, this method has limitations that do not make it useful for people with some income levels.

In fact, people with very high incomes may not benefit much from this model. People with low income, less than or equal to the minimum wage, may not be able to respect this rule.

In these cases, essential expenses exceed 50% of revenue. If this is your case, the tip is to save at least 20% or 10% of your earnings using the automatic savings deposit option.

If you want to improve your budget, learn more about this subject and how to save in the post below!

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About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

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