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The 50/30/20 Rule Demystified

July 16, 2019 · 5 minute read

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The 50/30/20 Rule Demystified

Have you ever created a budget, only to feel bogged down by its complexity? Or felt frustrated at having to find a specific budgeting category for every random item you buy at Target?

Does the idea of tracking your spending make you rub your forehead in pain? Do you quit every budget you start, because you simply cannot get into the groove? Well, you’re not alone.

But don’t give up. Creating and sticking to a budget is possible and can be very helpful.

Perhaps the solution is to simplify your system. Enter the 50/30/20 budget.

The 50/30/20 rule is a simple budgeting framework that is easy to implement and is one potential solution to help keep finances on track.

Each of the values in the 50/30/20 budget refer to percentages allocated to essentials, discretionary spending, and saving, respectively. The primary goal of the 50/30/20 rule is to learn to prioritize saving by making it the centerpiece of your financial plan.

Here’s how the 50/30/20 rule works and tips for implementing this budgeting technique. While these step-by-step tips—and help from technology—can help you have a better grasp on your budget, everyone’s financial needs and goals are different. And only you will know what works best for your unique situation. With all that said, let’s jump in!

How the 50/30/20 Rule Works

First, here’s how the 50/30/20 rule breaks down.

In this budget, you have only three categories to which you’d allocate your spending and savings, broken down by percentages. Here they are:

50% to essential needs: These are things you cannot live without and the bills you cannot avoid paying. Examples are groceries, health insurance, and mortgage payments.

30% to discretionary spending: Also known as personal spending, these are the things you buy that you could technically live without. Examples are new video streaming memberships and dining out.

20% to savings: This is the money you save for future financial goals. Examples are IRA contributions, money for a down payment, and extra payments to help pay off your loans sooner.

Even though the budget is written as 50/30/20, the purpose of this system is to prioritize the saving (the 20%). (It may be more appropriately named the 20/50/30 budget, but alas.)

The ultimate goal of the 50/30/20 budget is to make space for the 20% without laboring over the rest. Because really, the minutiae of where your fun money is going ($5 for a latte here, $10 for an appetizer there) isn’t super important if you’re saving enough to meet your goals.

If you aren’t saving 20% of your income right now, that’s okay. The purpose of the 50/30/20 budget is also to find out where your money is going so that you can make adjustments. After completing your budget breakdown, you can address the areas that you’d like to cut back.

Benefits of the 50/30/20 Budget

The 50/30/20 rule is a minimalist budget that can pack major benefits. For one, it is a budgeting system that anyone can implement. Here are a few more reasons to consider it:

  1. As the popular adage goes, “what gets measured gets improved.” It can be hard to improve on your savings goals without knowing how much and where you’re spending.

  2. Similarly, a 50/30/20 budget can reveal opportunities to reduce expenses. It’s so easy to lose track of the things that we buy. The simple, visceral act of seeing where your money is going may alone be enough to give you the kick in the pants necessary to make some adjustments.

  3. While building a budget may seem stressful at first, you may ultimately feel that it reduces stress by adding structure and clarity to your spending. Instead of feeling worried about every purchase, black and white boundaries may allow you spend more freely within your working budget.

  4. By having fewer categories than a traditional budget, 50/30/20 rule of thumb can be simple to maintain. It is also possible to track a 50/30/20 budget digitally, making it that much easier.

  5. Spending money is as easy as the swipe of a card. Because the act is so frictionless, it can be easy to forget—and even harder to keep track of. While budgeting has always been important, it might be especially crucial in the cash-free, card-heavy digital era.

It is unlikely that we’ll move away from a world where we use cards, scanning codes, and our smartphones to make payments. Therefore, it’s up to us to make sure we’re keeping track.

Implementing the 50/30/20 Budget

Want to give the 50/30/20 budget a try? If you decide to go this route, or you’re just looking for some budgeting basics, here are some steps you can take to get started:

  1. Wrap your head around how much income is coming in each month, and whether that income is fixed or variable. To use the 50/30/20 rule of thumb, you would look at your after-tax income. Think of after-tax dollars as the pot of money you have to siphon into the three budget categories each month.

  2. The next step is to build a hypothetical budget. To begin, start with the most important category: the 20% (savings). Remember, the goal for this budget is to turn the 20% into a non-negotiable part of the plan. So, you’d calculate 20% of your monthly after-tax income and set that figure aside for things like debt repayment, cash savings, retirement investing, and any other financial goals that you have. Even if you aren’t saving 20% quite yet, you might run the exercise assuming that you will.

  3. Next, take a look at the cost of your essentials. Currently, do essential items absorb more than 50% of your current income? If so, what percentage do they comprise?

  Then, add whatever percentage your essentials comprise to the 20% that you are setting aside for saving. For example, if your essentials take up 60% of your monthly income, then savings and essentials taken together would comprise 80%, and your discretionary spending would go down from 30% to 20%.

  4. After adding up savings and essentials, what is left behind is what can be allocated towards discretionary spending. When you’re first starting your 50/30/20 budget, you might not be at 30% right away—in the example above, 20% is left over for discretionary spending.

  5. The first change you can consider making is to limit discretionary spending to the percentage you determined in the previous step. At first, this may feel restricting, but you may come to feel differently about the exercise. You can look at whatever you have left over for discretionary spending as a pool of money you can spend however you please, knowing that you are now also saving.

  6. Now that you have a basic guideline of how much money should be allocated in each category, it’s time to put this plan into action. To do this, you’ll likely want to track your daily or weekly spending—at least until you get the hang of it. Plan on tracking for two to three months to start.

  7. After tracking for several months, you’ll probably have enough data to refine your original 50/30/20 budget. From there you can adjust the categories based on your actual spending, not just your projected spending.

  8. It is likely that throughout the entire process you have taken a look at your spending with a magnifying glass in order to identify areas to cut down on. If you haven’t done this yet, it might be time to do some digging into your current spending. You could get to know your expenses by looking at the last three months of spending and find areas that could use improvement.

  Areas of improvement could exist in both the essentials (50%) and discretionary spending (30%) categories. While discretionary spending is the first piece most people will need to work on to adhere to the 50/30/20 framework, monthly expenses can be cut on essentials as well. By reducing rent, bills, and transportation costs, it could be possible to free up more money for fun spending.

  9. After some tweaking, you can execute your new and improved budget. Continue to track spending in a method that works best for you. With ever-improving technology, there are more ways to track your budget online than ever before.

For example, SoFi Money is a cash management account that has features built directly into the app (as opposed to linking to a third-party budget app) that help you track spending and save for different goals.

You can take your budgeting game to the next level by setting up automatic transfers to savings accounts and debt payments, such as student loans and credit cards.

With practice, whatever system of tracking your spending you use can feel second nature. With some discipline, it’s amazing how much money can be saved by sticking to a budget.

With SoFi Money it is easy to see your weekly spending, set savings goals, and easily track your progress.

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