How the 50/30/20 Budget Rule works

by Lynn

50/30/20 budget rule

The 50/20/30 budget rule is simply a guideline that helps you budget your money accordingly. It offers a simple way to budget and allows you to reach your financial goals. Have you ever tracked your money to see where you’re spending it? You’d be surprised how much money you spend on non-essentials. The 50/30/20 budget rule can make budgeting easier for you as it is comprehensive and covers all aspects.

Here’s how the 50/30/20 budget rule works:

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50% Needs

According to this budget rule, you should allocate 50% of your earnings to your needs. These are strictly the necessities that you need to survive and those you can’t avoid. The 50% needs include:

  • Food
  • Housing – Rent/Mortgage / Service Charge
  • Basic utilities like electricity, water
  • Childcare essentials
  • Transport to work

After paying taxes 50% of your earnings should go to your obligations. Assess your income and expenses, if you’re spending more than 50% you need to reevaluate your lifestyle.

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30%: Wants

It can be hard to identify needs and wants. Wants are the things you spend money on but are not essential. They are more of lifestyle purchases. You should allocate 30% to your wants. These are the things you do for fun. This includes:

  • Traveling
  • Subscriptions like Netflix, gym membership
  • Entertainment
  • Takeout

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20%: Savings

Allocate 20% of your money to savings and investments. Before you start investing make sure you have an emergency bank account. Ensure your emergency bank account can sort you out for at least 3 months in case you lose your job. After meeting this target you can now start investing your money. You can invest in mutual funds, stock markets, or even real estate.

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