There are an endless number of budgeting strategies, spreadsheets and golden rules out there, but none are as pervasive as the age-old 50/30/20 rule.
Sticking to the 50/30/20 rule can give you peace of mind about your money — if it’s the right fit.
“Budgeting is very personal, so finding a saving and spending balance that you’re comfortable with is a matter of trial to see what fits,” Mary Hines Droesch, head of consumer and small business products at Bank of America, wrote in an email. “Financial stress is sometimes unavoidable, but one way to try and prevent it is by building a cushion into your budget.”
Keep reading to see if the 50/30/20 rule, also known as the balanced budget strategy, is right for you.
What Is the 50/30/20 Rule?
The 50/30/20 rule is a budgeting method that can help guide your monthly saving and spending.
To follow the 50/30/20 budgeting rule, put your after-tax income into three categories: 50% for needs, 30% for wants and 20% for savings or debt repayment.
Needs: 50%
Items like your rent or mortgage payments, groceries, transportation, basic utilities, and minimum loan payments fall in the “needs” category and should consume no more than half of your take-home pay each month.
Wants: 30%
The next largest category of “wants” includes discretionary expenses like travel, entertainment and subscriptions. This should not exceed 30% of your take-home pay.
Saving or debt repayment: 20%
Finally, when following this budgeting rule, you should aim to always save at least 20% of your take-home pay. This category includes depositing money into an emergency fund or contributing to a retirement savings account like a 401(k). Alternatively, if you’re aiming to reach certain debt-repayment goals that require paying more than just the minimum payments, you may choose to put at least 20% of your take-home pay toward debt repayment — or toward a mixture of both savings and debt repayment.
“The 50/30/20 method is fully customizable and meant to give you a recommendation on how to manage your finances,” Hines Droesch says. “For example, if you have a high spending month, follow it up by boosting your saving and reducing spending on wants the next month. I recommend routinely evaluating your saving and spending percentages to ensure they match your priorities and current lifestyle.”
[Read: How to Make a Budget — and Stick to It.]
The Benefits and Drawbacks of the 50/30/20 Budgeting Rule
Experts agree having any budget is usually better than no budget at all. But there are a few benefits and drawbacks to the 50/30/20 rule you should consider.
Benefits of the 50/30/20 rule:
— Simple method that doesn’t require itemized tracking.
— Good for beginners or those with straightforward financial situations.
— Offers a big-picture perspective on spending and income.
— More realistic than some other aggressive budgeting strategies.
Drawbacks of the 50/30/20 rule:
— Lacks detail.
— May not help individuals isolate specific areas of overspending.
— Doesn’t fit everyone’s needs, particularly those with aggressive savings or debt-repayment goals.
— May not be a good fit for those with more complex financial situations.
[SEE: 10 Best Budget Apps.]
Is the 50/30/20 Rule Right for You?
The 50/30/20 budgeting rule is best for beginners who are new to budgeting and those who have a fairly simple financial situation, experts say. Your personality and willingness to commit time to budgeting will also determine which strategy will work for you.
“The 50/30/20 budget can work for people who don’t need a constant check in on their money,” says Chris Muller, vice president of personal finance at XLMedia. “If you’re doing a 50/30/20 budget, you can still hit milestones like paying off debt, but it doesn’t allow you to take things to an advanced level and understand exactly where your money is coming from and going.”
If you are working toward an aggressive debt-repayment goal or savings goal, the 50/30/20 budget may not be a good fit or may need to be adjusted to meet your needs.
“Your money formula will change with the stages of your life, but it’s not just the stage of life but also the income you’re bringing in and the spending needs that you have,” says Amanda L. Grossman, a certified financial education instructor and founder of Money Prodigy. “For example, if you’re a young family, likely your spending on needs might be higher than 50% in the year of the birth of your child.”
[READ: What Is a Budget Calendar?]
Alternatives to the 50/30/20 Budget
There are many alternatives to the 50/30/20 rule. A few examples include the zero-sum budget, which aims to account for every dollar and assign it a job such that your income minus your expenditures equals zero, and the envelope method, in which individuals physically divide their cash into different envelopes dedicated to specific spending and saving purposes.
As high inflation continues to affect consumers’ spending and cost of living, Muller says adding more flexibility into your budget may be necessary instead of sticking to a rigid 50/30/20 rule.
“You might end up doing a 70/20/10 budget,” Muller says. “Have a strategy to evolve your budget. It’s easy to feel defeated in those situations. For me, our food costs are going up like crazy, and while it’s frustrating, it’s almost beyond our control to a certain extent so we just have to be flexible and adjust our budget. Give yourself grace for those things outside of your control.”
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What Is the 50/30/20 Rule? How to Know if the 50/30/20 Budget Will Work for You originally appeared on usnews.com
