Experts Claim the 50/30/20 Rule Is the Easiest Way to Keep Your Finances in Check

Source: Karolina Grabowska | Pexels
Source: Karolina Grabowska | Pexels

They say the best solutions are often the most simple ones, but when it comes to budgeting, that sentiment doesn’t seem to ring true. After all, money is complicated, and finding a budgeting method that gets the job done, isn’t difficult, and doesn’t take up all of your time and energy sounds like nothing more than a pipe dream. The truth is, though, there is one insanely simple strategy that actually works, and it’s called the 50/30/20 rule.

Unlike other budgeting methods, the 50/30/20 rule doesn’t constrict or limit where you can and cannot spend. Instead, it gives you a guideline to follow for spending, saving, and living expenses. So if you’re sick of ditching the budgeting apps after three days or tired of trying and failing to record all of your financial transactions, you’ve come to the right place. Keep on reading to learn everything there is to know about the 50/30/20 rule, and how you can implement the easiest way to budget into your life and keep your finances in check.

What is the 50/30/20 rule?

The 50/30/20 rule is a budgeting strategy that was popularized by Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan. This rule states that 50% of your monthly income should go toward needs, 30% toward wants, and 20% toward financial goals. For example, if you make $5,000 a month, $2,500 would go toward needs, $1,500 would go toward wants, and $1,000 would go toward financial goals.

Needs are the things you absolutely cannot live without and the expenses you can’t avoid. This would include things like your rent or mortgage, groceries, utilities, minimum loan payments, and insurance. Wants are “fun” expenses that aren’t essential to your survival—like a night out, traveling, streaming services, and so on. Financial goals are the things that help you build a nice financial cushion, become financially stable, and prepare for the future; contributions to savings, investments, retirement portfolios, and debt payments would fall into this category.

Why the 50/30/20 rule works

The beauty of the 50/30/20 rule is its simplicity. It tells you exactly how much money you need to set aside for living expenses, savings, investments, and debt payments, and how much you can realistically afford to splurge. Likewise, it also helps spenders save more without feeling ultra-restrictive—they have 30% of their income to put toward whatever their heart desires. And when you have the freedom to choose how you spend, budgeting becomes easier. All in all, this is a straightforward and effective way to manage your money, work towards your financial goals, and make smarter money moves.

How to apply the 50/30/20 rule to your life

Determine your 50/30/20 budget

Since this budget is based on your monthly income, the first thing you should do is figure out what yours is. For the self-employed, this will be the amount that goes into your bank account after paying for business expenses and setting aside money for taxes. If you’re employed, this will be what your employer pays you after withholding taxes, your share of health insurance premiums, and other deductions. Likewise, any additional streams of revenue—employed or self-employed—should be factored into the total amount of your monthly income as well. And if your income varies, use the steps above for the last six months to calculate your average pay; this figure will be your monthly income.

Once you’ve figured out what your monthly income is, you can then use that number to determine what your 50/30/20 budget should be. You’re more than welcome to do this by hand, but if you want to save time and energy, you can use this free 50/30/20 budget calculator from NerdWallet.

Review and categorize your spending

Look at your bank statement from the last month and categorize your spending into three categories: Needs, wants, and financial goals. Then, add up the total amount for each. Distinguishing between wants and needs can be challenging, so if you’re having trouble discerning which is which, try asking yourself whether or not something is crucial for your survival, and be honest with yourself and your answers. Looking at this from a logical POV rather than an emotional one can also help you categorize accordingly.

For example: Buying a new computer because you’re sick of your aesthetic would be classified as a want because it’s a treat and not a necessity. However, buying a new computer for the sake of combating chronic pain so you can work better would be categorized as a need; that computer is directly affecting your work performance and health, and both are essential for your survival (work pays the bills for your needs, and health is wealth).

Adjust your spending to fit into your 50/30/20 rule

After reviewing and categorizing your spending, compare it against your 50/30/20 budget. If you see that you’ve been overspending, figure out how you can make changes and fit everything into your new budget. This may mean cutting back on certain areas or removing them altogether. Likewise, take into account your current financial situation and goals. If you’re aggressively paying off student loans, you might want to bump your savings and debt payment category up to 25 or 30% and bring your wants category down to 20%. This also goes for the times you’re preparing for a big financial event, like a wedding or down payment on a house—you’re going to want to save more.

The wants category is undoubtedly the easiest area to overspend in. However, making small daily lifestyle changes can help. This might mean making your coffee or meals at home during the week, buying clothes only when they’re on sale during certain times of the year, and so on. Making small lifestyle changes will help you save tremendously, and the more you save on luxuries, the more you’ll be able to set aside and ultimately reach your financial goals.

Track your expenses

Knowing how much you should be spending and where is a great starting place, but tracking your expenses is what’s really going to make the 50/30/20 budgeting method stick—especially in the beginning. You can do this through a budgeting app like YNAB or Mint, a budgeting template, or a financial planner. Tracking your expenses will show you where your money’s going, help you hold yourself accountable for your spending, and help you get on your feet as you navigate your new budget and work on bettering your money habits.

That said, Rome wasn’t built in a day. If you find that you’re having difficulty controlling your spending, consider opening a separate bank account with a debit card so that you can deposit your “fun” funds. This will prevent you from overspending and pulling from savings. Likewise, you can also get a credit card with a spending limit or try carrying around a certain amount of cash to use for your wants each month. In all cases, once the money runs out, you’ll have no more spending money.

At the end of the day, the 50/30/20 budget is the easiest way to become more financially savvy. It subconsciously teaches you how to handle money better and become more conscious of your spending while simultaneously breaking old, unhealthy money habits. It’s the guideline that will help you become the kind of woman who always has extra money and doesn’t lose sleep at night over her financial situation because she knows she’s covered.