The 50-30-20 Budget Rule to Manage Your Finances

The 50-30-20 Budget Rule to Manage Your Finances

There is a simple principle that makes budgeting easy. The 50/30/20 budget rule helps you allocate your finances in a manner that is effective and financially productive. This principle was made popular by Elizabeth Warren’s best selling book “All Your Worth: The Ultimate Lifetime Money Plan” and has become a popular budgeting tool.

The 50-30-20 rule states that you should spend 50% of your net income on needs, 30% on wants, and 20% on savings or investments.

The 50/30/20 rule is a budget guide to creating a more efficient budget for your finances. With it, you can create a plan for all your necessary expenses without eating deep into your pocket.

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Here’s how to improve your finances with the 50/30/20 rule:

1. Determine your net income

The first step to creating a budget is to calculate your total net income. This is the amount of money that comes to you after tax deductions and other contributions. As an employee, this corresponds to your monthly salary.

2. Categorize your expenses

The next step is to itemize all your monthly expenses in their different categories. 

50-30-20 budget rule

  • Fixed expenses (needs)

Needs are the essential requirements needed for survival. They are very important “must-haves” and so, 50% of your net income should be allocated towards meeting them. Needs include housing, food utilities, healthcare, insurance, etc. 

  • Lifestyle costs (wants)

Wants are expenses that go beyond needs. They are not absolutely essential but help make life enjoyable and easy. Wants include entertainment, shopping, visits to restaurants, travel, subscriptions, electronic gadgets, etc. 

  • Savings and Investments

Savings and Investments are essential to planning for the future. They include all savings, payments into a pension fund/insurance, emergency fund, and investments. It is advisable to first build a 3-month emergency fund before focusing on saving towards meeting other financial goals.

Do you know how much money you spend on your wants and needs each month? What do you need to do to plan your finances according to the 50/30/20 rule?

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