Budgeting can seem pretty straightforward, but there are many strategies you can use to reach your goals. One of them is the 50/30/20 rule for allocating your monthly earnings.
But is it right for you? Here’s what experts say.
What Is the 50/30/20 Rule?
The 50/30/20 method is a budgeting framework that suggests spending after-tax earnings as follows:
— 50% on needs and obligations such as rent, groceries and bills
— 30% on wants and discretionary spending
— 20% on savings and debt reduction
“By allocating 50% of your income to needs like housing, transportation and childcare, you ensure stability for your family while also fostering smart spending habits,” Matt Gromada, managing director and head of youth, family and starter banking at JP Morgan Chase & Co., said in an email.
He adds that dedicating 30% to wants like family outings, hobbies and entertainment can provide balance and nurture healthy relationships. Meanwhile, putting 20% towards savings and future goals ensures financial security.
[Related:Financial Security: What Does It Actually Mean?]
When the 50/30/20 Rule Can Work For You
If you’re new to budgeting and aren’t sure how much you should spend or save, the 50/30/20 budget can provide a helpful framework.
“The 50/30/20 rule is a widely applicable budgeting method for anyone starting out on their financial journey or looking for a consistent way to keep up with their savings goals,” Mary Hines Droesch, head consumer and small business products at Bank of America, said in an email.
“This plug-and-play method can take the guesswork out of budgeting and allows you to have a full view of where your money should go,” she added.
Once you know you’re trying to spend 50% on necessities, for example, you’ll have a better idea of where your house payment, car payment, bills and grocery budget should land. If your mandatory expenses come out to 60% or 70% of your after-tax income, you’ll need to make some adjustments.
“This budgeting method is a great way to map out your money and is perfect for the everyday consumer who is looking to get a handle on their spending and meet certain financial goals. It’s ideal for someone just getting started,” Andrea Woroch, consumer and money-saving expert, said in an email.
[SEE: 10 Best Budget Apps.]
If you’ve been struggling with budgeting because it requires sacrifices and discipline, the 50/30/20 method can also be helpful because it makes space for fun and enjoyment.
“One of the most important aspects of these percentages is that it helps you think about today and tomorrow, and still reminds you that it’s OK to spend your money on discretionary things like movies or clothes.” Theresa Nikolaus, vice president and regional delivery manager responsible for the consumer retail division in St. Louis at UMB Bank, said in an email.
“The key is to make sure you aren’t just spending on autopilot, but being thoughtful with your expenses and buckets,” she added.
[Read: Inside the Psychology of Overspending and How to Stop.]
When the 50/30/20 Rule May Not Work For You
While the 50/30/20 method can be helpful, it’s not the best fit in all situations.
“If you live in a higher cost-of-living region or have an irregular income, you might need to adjust the percentages to fit your lifestyle. Additionally, some people may benefit from splitting their expenses into more than three categories to paint a clearer picture of their finances,” Hines Droesch said.
The method may also be problematic if you don’t think you’ll stick to it, or if you want to sacrifice personal spending to reach a goal faster.
“If you have trouble sticking to ‘rules,’ or aren’t going to sit down and divide your expenses into categories, this probably isn’t the method for you. If your main goal is to pay off debts or to strictly save, you may also want to explore other methods. This method is best for those first creating a budget to help see where money is going, learn patterns and establish a savings,” Nikolaus said.
Further, the 50/30/20 rule doesn’t guide you to make investments outside of saving for retirement, which will be a problem if that’s part of your financial plan.
“For those who are eager to invest more aggressively and grow their wealth, this budgeting method won’t help get you there. You need to be more aggressive with cutting down on expenses and increasing how much you save and invest each month,” Woroch said.
The Bottom Line
The 50/30/20 budgeting rule can be a helpful guideline when you first start budgeting. It provides a clear framework that helps you cover your immediate needs, plan for the future and enjoy the now.
However, as you advance in your budgeting, you may want to get more granular with how you allocate your money.
For example, you might want to invest in the stock market through a taxable account. You may have financial goals that require more or less than 20% of your income. And, in some cases, your mandatory expenses may require more than 50% of your income.
If the 50/30/20 rule doesn’t suit your current situation, that’s OK. The most important thing is to find a system that works for you, which may mean building a custom budget.
“The best savings plan is the one you’re going to stick to. You can work with a financial advisor through your bank, or even look for resources on their website to improve your financial literacy and find a plan that works for you and your goals,” Nikolaus said.
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How to Know if the 50/30/20 Budget Will Work for You originally appeared on usnews.com
Update 09/23/24: This story was published at an earlier date and has been updated with new information.
