What is the 50 30 20 rule of money?
The 50 20 30 rule of money is a budgeting rule which simplified the budgeting process of personal finance. It is a money management formula which focuses on allocating your monthly after tax income a.k.a paycheck, to 3 important buckets. They are
- 50% for Essentials (Fixed Expenses),
- 30% for anything else (Flexible Variable Expenses) and
- 20% for Savings (Investments included)
To save up enough money with the least amount of work, you can automate your savings with this budget rule. Examples for each buckets are:-
- 50% for essentials: Rent and other housing costs, groceries, gas, etc.
- 20% for savings: Savings accounts, retirement contributions, loans, credit card payments, etc.
- 30% for everything else: Nonessential expenses like clothing, restaurants, monthly streaming subscriptions, gyms, etc.
Why is the 50 30 20 rule beneficial?
Sometimes it becomes hard to create your very own budget and may even not be possible for you to go into detail in depth into your expenses. In such cases, just having this overall budget rule can help you ensure that you are saving the bare minimum which with time and compounding effect, can grow into a substantial amount without giving you the stress or not reaching your goals.
How can you use the 50 30 20 rule?
- Will recommend you start identifying all your expenses and money allocations
- Categorize these expenses and allocations
- Then put them into the 3 buckets of the rule
- Continuously monitor to ensure you are at least closer to the savings side of the rule or more even.
What are The weakness of the 50 30 20 rule?
The fact is when it comes to expenses one size doesn’t fit all. So these are the weaknesses invovled:-
- For example, people living in cities may need to spend almost their full paycheck on rent.
- If you freelance, or run your own business, your income might be too irregular for such a hard and fast rule.
- Having high loans such as home loans or high student loan debt
What to do if this rule is hard to follow or this rule does not apply to you?
While it might be easy to remember, the rule isn’t always easy to live by. If the 50-20-30 budget doesn’t fit your lifestyle, try one of the variations listed below.
What are the other variations of this rule?
Although this is a simple rule based on your financial appetite or responsibilities, there are other variations of the rules such as the 70 20 10 rule and the 60 30 10 rule etc. Will be writing more about these rules separately.
What if none of the general rules apply to you or it is difficult to follow any rules?
If the above rules do not apply to you, then I suggest trying the 80:20 plan. The 80-20 plan is simple. Instead of having to categorize every single expense into what is essential and what is not, you simply take 20% of your paycheck and deposit it directly into your savings account. The rest 80% is yours to spend however you want.
Try the above and see the difference in managing your money. If you have more time, then making a custom budget plan is also a good practice besides the above rules.
That is all about the 50 20 30 rule of money. If you have any questions, you can leave an email to yourrichfreedom@gmail.com and we will be happy to answer them. We hope this article was helpful to you. For more such articles, consider subscribing to the newsletter on www.yourrichfreedom.com. Let us reach Your Rich Freedom together!
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