There is no need to complicate budgeting, nor should it take up a lot of time. Using the 50-30-20 rule, you can budget your monthly expenses exactly according to your savings and living costs. It’s easy to avoid overspending and build your savings with a clear monthly budget that shows you the big picture without having to record every single transaction.
The 50-30-20 method might be a good option if you’re in the habit of downloading budgeting apps only to abandon them by the third day. Check out this budgeting tip, which we found to be one of the best.
What is the 50-30-20 Rule?
Budgeting with the 50-30-20 rule is an easy, simple, and sustainable way to manage your money. It says to allocate 50% of your after-tax income to necessities, 30% to wants, and 20% to savings each month.
Keep your expenses balanced across these major spending areas to put your money to work more effectively. Spend less time and energy digging into the details of each category when you only have three to track.
You can apply it effectively to reach any financial goal, from saving for a rainy day to paying off debts.
How to Effectively Apply the 50-30-20 Rule
A 50-30-20 budget may look like this:
Use 50% of Your Money on Needs
Expenses for necessities are expenses that can’t be avoided. After taxes, you should be able to cover your most necessary expenses with 50% of your income.
These needs may include:
- Housing rent
- Utility bills
- Transportation costs
- Healthcare, vehicle and other insurance
People have different budgets. Make some changes if your expenses exceed 50% of your take-home income if you find that your needs exceed 50%. You could do this by switching to a different energy provider or finding ways to save money while grocery shopping. The change could also entail a bigger change in lifestyle, such as finding a less expensive place to live.
Use 30% of Your Money for Wants
In addition to meeting your most basic needs with 50% of your after-tax income, 30% can be used to meet your wants. You can live without wants if you have to because they are not essential expenses.
- Apparel shopping
- Dining out
Following the 50-30-20 rule doesn’t mean you can’t live your life to the fullest. Curbing unnecessary overspending in your budget can make you more conscious about your money.
Keep 20% of Your Money for Future Use
You can build a better, more durable savings plan by consistently setting aside 20% of your pay each month. It doesn’t matter if you’re working towards building an emergency fund, planning a long-term financial future, or even saving for a down payment.
Also know about: How to File Taxes as a Freelancer
How to Apply the 50-30-20 Rule: A Step-by-Step Guide
How does the 50-30-20 rule actually work? This simple budgeting rule requires you to categorize your spending by income and calculate the 50-30-20 ratio. How it works:
1. Calculate Your After-Tax Income
Calculate your after-tax income before applying the 50/30/20 rule. If you are a freelancer, your after-tax income will be your monthly earnings, less your business expenses and your tax set aside.
This will be easier if you have a steady paycheck as an employee. Observe how much money lands in your bank account each month based on your payslip. Health insurance and pension funds may be automatically deducted from your paycheck. Add them back in.
2. Make a List of Your Recent Spending by Category
In order to understand where your money goes each month, you have to look at how and where your income has been spent. Insights are available on the N26 app, or you can download a copy of your bank statement from the past 30 days. Your transactions are automatically organized into categories such as Food & Groceries, Salary, Leisure & Entertainment, and more.
3. Assess Your Spending and Adjust It to Match the 50-30-20 Rule
You can now adjust your budget to reflect the 50-30-20 rule once you know how much of your money goes to needs, wants, and savings each month.