We all strive to achieve financial stability, yet it can seem elusive amidst our daily expenses and the ever-present temptation to splurge. The 50/30/20 rule can help you streamline your budget and build the foundation for a strong financial future. Read on to explore the nuts and bolts of this rule and how you take control of your finances.

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What is the 50/30/20 Rule?

The 50/30/20 rule is a budgeting framework that suggests dividing your post-tax income into three categories:

  • Needs (50%): Your essential expenses, such as housing, utilities, groceries, and transportation. These are the costs you cannot avoid and must prioritize. 
  • Wants (30%): This portion of your budget is allocated to the non-essential items and experiences that improve your lifestyle, like dining out, entertainment, and hobbies.
  • Savings or Debt Repayments (20%): At least 20% of your income should go towards building your savings or paying off debt. This includes contributions to an emergency fund, retirement accounts, and any outstanding credit card or loan balances. 

The key is in knowing where your money goes each month. By allocating a set amount to different areas of your life, you can stay within budget while prioritizing your most important expenses. That way, you can minimize—if not totally eliminate—debt and build your savings.

Implementing the 50/30/20 Rule

Are you ready to implement the 50/30/20 framework in your own life? If so, congratulations—you’ve just taken the first step towards creating a sustainable budget. However, implementing this rule requires a thorough understanding of your finances. Here’s how to get started.

Step 1: Categorize Your Expenses

Begin by listing all your monthly expenses and categorizing them as needs, wants, or savings/debt repayments. Try to think realistically about what constitutes a need versus a want. For example, while a cell phone plan might be a need, the latest smartphone upgrade might fall under wants. Other examples of wants may include:

  • Travel expenses
  • Entertainment
  • Designer clothes
  • Gym memberships 

Remember that wants and needs aren’t the same for everyone. What one person considers a want, another might deem a need, so be honest with yourself while accounting for your personal situation. 

Step 2: Adjust Your Spending

Now it’s time for the hard part: adjusting your spending to fit the 50/30/20 rule. If you find that more than 50% of your income is going towards needs, look for ways to reduce those expenses. Likewise, if your wants exceed 30%, it’s time to cut back.

This can take time. The average American impulsively spends about $150 each month, so if you’re struggling to adjust, just know you are not alone. You may not get the rule right the first time, and that’s okay. Keep at it and continually look for ways to cut back.

Step 3: Prioritize Savings and Debt Repayments

Don’t make the mistake of treating savings as an afterthought. Be sure to save a decent portion of your post-tax income, whether it be in a basic savings account, retirement account, or some type of diversified investment portfolio.

Make sure to pay off debts. The average American household owes $104,215 between mortgage loans, credit card debt, student loans, and more. If you’re among them, allocating 20% of your income to savings and debt repayment is the best way to start building true wealth.

Common Challenges—And Solutions

The 50/30/20 rule requires a healthy dose of self-discipline, to be sure, and many people find it challenging to stick to. Here are some of the challenges you may encounter when getting started with this framework and how you can overcome them.

Income Fluctuations

Not everyone has a fixed income stream, which can make following the 50/30/20 rule difficult, to say the least. To get around this, consider creating a baseline budget for your lowest expected monthly income. During higher-income months, set aside surplus funds in a savings account to cover shortfalls in leaner months.

Surprise Expenses

Unexpected expenses—such as medical emergencies or car repairs—can really throw off your budget. It’s a good idea to create an emergency fund to prepare for such events and avoid derailing your budget. Experts typically recommend saving three to six months’ worth of living expenses. 

Lifestyle Inflation

If you’re like most people, the first thing you want to do when getting a raise or receiving a large sum of money is buy that new car or book that trip you’ve always wanted to take. But it’s important to be mindful of your budget and stick to the parameters of the 50/30/20 rule. 

Here are some tips for combating lifestyle inflation: 

  • Track your spending
  • Make and stick to a budget
  • Cut unnecessary recurring expenses
  • Automate your savings
  • Invest your pay raises

While it may be tempting to splurge with that extra cash, a little caution can go a long way. It’s entirely possible to balance fun expenses with the 50/30/20 rule with the right planning and budgeting.

Budget Better With the 50/30/20 Rule

While no two budgets are exactly alike and your needs will probably change over time, the 50/30/20 rule is a great place to start. This framework offers a helpful approach to budgeting and can get your finances on track for long-term success.

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