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When it comes to budgeting we all have to start somewhere. Maybe you've never had a budget before or have unhealthy financial habits and have found yourself in overwhelming debt. Maybe you write down all of your expenses but you never seem to see your savings account grow.
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This is where the 50/20/30 Rule comes in. It's a great personal finance tool that can act as a starting point for getting your accounts in order. It was one of the first steps we took in working our way into the 800+ Credit Score Club and I wrote about it in my Amazon bestseller,The Beginner's Guide to Budgeting. (This post contains affiliate links. Please read my Disclaimer for more information.)
One of the first things you should have before starting this method is an accurate amount of expenses so that you can properly sort them into each section. You can track these in a old school notebook or use something a little more specialized, like this expense tracker book. I like that it's roomy enough that you can label expenses as fixed or flexible.
There are different definitions for what costs should fall under each number. For simplicity's sake we'll say that 50% of your take home pay should be on fixed expenses, 20% on savings, and 30% on flexible expenses.
The 50/20/30 Rule Example:
Income after Taxes: $3,500 (50%)
Mortgage/Taxes/Insurance $900
Car Loans $300
Subscriptions $10
Phone & Cable$100
Student Loans $250
Auto Insurance $160
Total: $1,720 (49%)
20%
Roth IRA Contributions $350
Emergency Fund $100
529 College Savings Plan $285
Total: $735 (21%)
30%
Groceries $400
Eating Out $150
Gas $100
Haircuts $20
Entertainment $200
Hobbies $180
Total: $1,050 (30%)
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50/20/30 Rule is a Starting Point
As you can see, this budget falls perfectly in line with the 50/20/30 Rule. Fixed expenses hover at 49%, savings are at 21%, and flexible expenses are at 30%. However, while I think it can be a great starting point and a wonderful tool, I don't think it is for everyone.
Take for example a couple who wishes to retire on a beautiful beachfront home in Florida. If they only save 20% of their income and only a portion of that is in interest accruing retirement accounts (assuming a piece of that 20% goes to an emergency fund and college account as well), they may never be able to afford a home in that kind of real estate.
Think of the 50/20/30 Rule as the start of what I'll call the Candy Land of finances. You would never take your first step (i.e. budgeting) and then completely stop playing, would you? No way! You would work hard to continue progressing until you finally finished the game (i.e. retirement).
Needs vs. Wants Scenario
Some personal finance writers look at the 50 and the 30 as a needs vs. wants scenario. You need a loaf of bread so it falls under the 50 category. You want a pint of ice cream so it falls under the 30 category. I personally don't use this method because such a detailed examination of our budget is nearly impossible. We track the spending of more than one person in our home. There would definitely be some discrepancy about whether we need or want ice cream! Besides, who has the time to comb through and itemize every single receipt?
If this method really appeals to you though, that's fantastic! Your awareness of knowing exactly where your money is going will fly sky high. Nothing will slip through the cracks anymore. And your purchases will be well-thought out and kept to a minimum, just so you can avoid having to itemize anything for the day.
The bottom line is that the 50/20/30 Rule is a great place to start in getting your budget in order. Don't feel bad (in fact do a happy dance!) if you don't fit the mold and your savings is higher or your expenses are lower than the Rule recommends.
A good rule of thumb is to make sure the combination of your fixed and flexible expenses never exceed 80%. Cheers to the man or woman who lives by the 50/40/10 Rule! The sooner you decrease your expenses and put the excess towards savings, the closer you'll be to that Florida retirement home.
Do you live by the 50/20/30 Rule? Does it work for your budget?