The most important part of making money is to save more and spend less. Yes, it’s not about having that billion-dollar idea or a big multinational. It’s just about having a budget and the 50/30/20 budget rule will help you with that.
People are often confused about how to create a budget. Different advisors and finance managers give different advice. And many times we are not able to hire these finance managers. But the 50/30/20 rule of thumb will make your life easier.
During the pandemic, I was hardly able to save any money, but the biggest problem was I didn’t know where the money went. This was the time when I decided to start budgeting. The idea was just to track my expenses. So that at the end of the day I have a track of my money.
But while researching money management and reading multiple books on finance I came across the 50/30/20 rule of finance. I thought why not let me just sit down and try to budget things out using this method.
Table of Contents
- 0.1 Where Does the 50/30/20 Rule of Thumb Come From?
- 0.2 What Is the 50/30/20 Rule of Thumb?
- 1 How to Use the 50/30/20 Rule of Thumb for Budgeting
Where Does the 50/30/20 Rule of Thumb Come From?
Now the first question that might have come to your head is where does this 50/30/20 budget rule come from? Elizabeth Warren(yes the 2021 presidential candidate) along with her daughter Amelia Warren Tyagi in their book,” All Your Worth: The Ultimate Lifetime Money Plan,” mentioned this idea for the first time.
Just to put things into perspective Elizabeth Warren, is a Harvard bankruptcy expert and US senator. Referencing over 20 years of research, they came up with this method so that even the layman with no financial knowledge and expertise can sit down and create a budget.
Elizabeth mentions in the book that you don’t need an accountant or an advisor to control your finances. And a complicated budget to follow, all you need to do is to follow the 50/30/20 thumb rule of budgeting.
What Is the 50/30/20 Rule of Thumb?
The 50/30/20 rule of thumb is a simple budgeting technique that is intended to help even the layman in budgeting his income. Financial knowledge is an important aspect of surviving in this high inflation world.
There have been stories about how a millionaire went broke in a matter of years. Getting rich has two simple aspects to it. The first is to earn money from more than 1 source and save money.
Many times people know how to make money, people make money through different means, but the next important step is to save that money and grow that money. The sad truth about today’s generation is that they lack knowledge about growing money.
This is where the 50/30/20 rule comes into the picture. The rule helps to simplify the money management aspect. The rule is meant for the middle class who cannot afford a financial manager.
The rule is simple: you need to divide your after tax income into 3 parts.
Set aside 50% of the money for Needs
The biggest portion of your after-tax income should go towards your needs. The needs are something that you cannot live without. Try to minimize your needs and make sure you don’t add your wants into the needs. Below are some examples of the needs
- Electricity bill, water bill
- Minimum loan payments
From the above list, you may have got the gist of what things that we are talking about in the needs department. If things are not fitting in this 50% bracket. Then you might need to make some changes to your lifestyle.
Like moving to a house with cheaper rent. Minimising your use of electricity, by going towards a minimal lifestyle.
Set aside 30% for your Wants
The 30% of the total income is for you to move your hands a little. You can use this money for things that keep you motivated.
- Netflix, OTT subscription
- Dinner Date
- Memberships etc
The 30% doesn’t mean you go splurging on unwanted things. Make conscious buying decisions. Because more money saved is more money gained.
Set aside 20% for savings.
After your needs and wants, the 20% money left needs to diversify various investments. The first thing you need to do is to save for an emergency fund. Life is very unpredictable. You cannot hope the best of things will happen to you. Being prepared is the best you can do.
Distribute your 20% saving in different accounts. Below are some of the examples of investment and diversification
- Mutual Fund
- Emergency fund
- Stock investment
- Fixed deposit
Make sure you have a good knowledge of where you are putting your money. No is responsible but you for your money. But the first thing from the 20% saving is to save up for the emergency fund. Save approximately 6 months of income in this fund.
How to Use the 50/30/20 Rule of Thumb for Budgeting
According to studies around 73 % of the people in America (income less than $50,000) are living paycheck to paycheck. Most of them don’t even have savings to survive for more than 6 months.
It’s not that people are not making money. Many people with lower income hold multiple jobs. But the biggest problem is not able to budget their money properly.
People often are carried away by the so-called society norm of showing off the richness. People often tend to be someone, who they are not. Buying things just to show off is the greatest stupidity.
The 50/30/20 rule is for the people who want to come out of this trap. Creating a budget should be a habit that you need to create. Below are the simple steps to use the 50/30/20 rule of thumb for budgeting
Calculate your After Tax money:
The first thing you need to do is calculate the total after-tax money that you make. This amount is basically the amount that you will receive in your bank.
Calculate monthly Threshold:
Multiply your take-home amount by 0.50 (for needs), 0.30 (for wants), and 0.20 (for savings) to see how much you should ideally spend in each category. This amount will set a benchmark amount for how much to spend
Plan and follow the Budget:
The last and important step is to plan and manage your budget. Create 3 budgets and fill them with the things required. And make sure you are well below the threshold amount calculated.
The threshold amount is an indicator amount to not cross beyond. If you are planning to buy a smartphone and an earphone, But the budget only allows for one. Then buy one and wait one month to buy the earphones. This will help you to stick with the budget.
Is the 50/30/20 rule good?
I am not a personal advocate of the 50/30/20 rule since this budgeting method is more suited for people between the age of 30-45. Since I am young and don’t really have much responsibility all many times go all in. By all, I mean I put money heavily into investing. My 60-70% of the monthly income is invested.
But the 50/30/20 rule is great for people of the age 30-45. Since it is assumed this age group has been a settled family and needs money to look after the family. The rule helps to give more flexibility and manage money without any external support.
The 50/30/20 rule Spreadsheet.
The best way to manage your budget is to track your budget in a spreadsheet. The 50/30/20 rule spreadsheet will help you to have a birds-eye view of all the money you spend in one place.
The spreadsheet will help you track money and manage your money in a simple and portable way. I will be designing a 50/30/20 rule spreadsheet. If you are interested in getting one then tweet this article and tag @geeksla and @chetanpoojari7 on Twitter.
I will surely create a spreadsheet then.
I really like the 50/30/20 rule since it provides more clarity on the amount made and spent. The budgeting rule will help people to manage their own money and not hire a financial manager.
The budgeting rule gives freedom and control over the money and helps more sound and smart money decisions.
Disclaimer: This article is for entertainment and information purposes only. You are completely responsible for any action you take with your money.