What is the 50/30/20 Rule and how would you start practicing it?

Elizabeth Warren’s 50/30/20 rule, the perfect monthly budget breakdown was conceived by her daughter, Amelia Warren Tyagi, an influential US senator and bankruptcy lawyer. They outline this budgeting percentage rule in their 2005 book, All Your Worth: The Ultimate Lifetime Money Strategy, to help people figure out how much money they should spend – and how much they can save.

What is the 50/30/20 law, exactly? Let’s take a closer look at how to better everyone’s personal money management.

What Is The 50/30/20 Rule?

The 50/30/20 rule is a basic budgeting guide that identifies three possible paths for your money. According to this rule, 50% of the money should be spent on needs, 30% on wishes, and 20% on savings or debt reduction. It’s as simple as 50, 30, and 20.

A budgeting percentage rule like this is meant to make personal financial planning easier. It removes the need for a comprehensive budget and enables you to put money aside right away without losing fun.

A basic rule to prepare your monthly budgets with THREE main categories is 50-30-20.

  • Needs – 50% are essential things you need for your life (or survival) such as Food, Housing, Water, Gasoline, Electricity, etc.
  • Wants – 30% are things you may want but could live without. They’re flexible spending categories depending on your lifestyle. Most of them make you feel happier like Movies, Travel or even Games.
  • Savings – Set aside 20% of your net income in savings account for emergencies or to pay off loans or credit card debt.

How Do You Start Practicing the 50/30/20 Rule?

80% of young professionals are unable to stick to their budgeting plans. To make budgeting successful, you must track your everyday expenses and categorize them to determine your needs, desires, and how much money you have left to save.

1. Know Your Monthly Net Income

Your gross income is the total of all your income coming in, whether from your salary, allowance, rents, and etc. Your net income is your gross income minus your taxes (PCB), EPF, EIS, and SOCSO. Use this calculator to help you narrow down your net income.

2.  Define What You Need

You’ll need to figure out what your needs are. These would be fairly common for most people: rent, bills, food, council tax, and commuting expenses. You’ll have to determine whether or not a TV license or a Netflix subscription is necessary. It’s all up to you.

In the end, these requirements should account for approximately half of your profits. While people attempting to live and save money in KL can discover that their needs exceed 50%, the goal is to keep costs as close to half as possible. If you don’t, you’ll have less money to spend on your “wants.” What would you do to make that happen? Switching from the train to your bike for your commute might save you a few pounds. A packed lunch instead of a regular café visit would also benefit.

2. Identify Your Wants

The next 30% of your earnings will be spent on “wants.” However, as appealing as this might sound, there might not be much space for you to indulge in excessive frivolity. Anything that isn’t purely required is made up of your “wants.” Consider travel, nights out, movies and other types of entertainment, gym membership, coffee, concerts, and other leisure activities.

3. Save – or Pay Back those Debts

The remaining 20% can be used to increase your savings – or to pay off any debts you might have accrued previously. Some of it will go toward pension payments, some toward paying off your student loan, and some toward putting money aside to buy your first home. What’s more, putting this 20% aside first on payday is a good idea.

4. Track Your Expenses

Now that you’ve identified your 50/30/20 on paper, you have to ensure your spending sticks to the plan. Track every sen of your spending and at the end of each month you should tally and review your spending. Adjust where needed, and continue tracking and reviewing every month.

Does the 50/30/20 Rule Work?

If you’re unsure how to start a budget, breaking it down into these simple categories can be extremely beneficial. These percentages aid in the creation of a healthy balance between responsibilities, priorities, and splurges.

It’s certainly preferable to follow this rule than have no rule as well. In particular, it is great for persons who have difficulty balancing their spending, foregoing savings and investments in favor of using up their income on wants.

However, this rule would not work if you don’t make a lot of money (e.g. students, junior-level employeers) – you may need more than 50% of your small income to cover your monthly necessities.

It also may not work for those who are on an aggressive plan to pay off debt or commit to a new investment. 20% savings would be rather paltry and insignificant with your intentions.

 

Does the 50/30/20 Rule work for you? 

 

You May Also Like