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The 50/30/20 Budget Rule Explained
Wealth Management
December 5, 2022

# The 50/30/20 Budget Rule Explained

Have you ever heard of the 50/30/20 rule? Well, if you’re like most people and you’d like to save more money, then this rule can help you with that. The beauty of the 50/30/20 rule is that it’s really simple and easy to use. You don’t have to be an accountant or spend hours upon hours every week trying to figure out your budget. But you will get more insight into your income and expenses, and over time, you’ll save a lot of money without much effort.

When you’ve finished this article, you’ll know what the 50/30/20 rule is and how you can use it to save a bunch of money.

## What is the 50/30/20 Rule?

You may be wondering, “What is the 50/30/20 Rule?” This is a form of budgeting to help you save money. Especially if you struggle to put aside a part of your income towards saving, the 50/30/20 rule might be just the thing you need. What this rule basically comes down to is that you take your monthly income and then split that amount up into three categories where you can spend it:

50% goes to your basic necessities, 30% goes to things you like, and 20% is for saving.

### How to use the 50/30/20 rule in budgeting?

If you want to use the 50/30/20 rule for budgeting, the first thing you do is to get clarity on exactly how much money you have coming in every month. Usually, this is your salary, but maybe you have some other forms of passive income as well. Also, note that you’ll want to know your after-tax income.

Once you know your monthly income, you divide that amount into three categories: needs, wants, and savings.

## The 50/30/20 calculator example

Let’s see what the 50/30/20 rule looks like in a real-life example. In this example, your after-tax monthly income is €2000.

• €1000 goes to your basic needs. (50%)
• €600 goes to your wants. (30%)
• €400 goes to your savings. (20%).

### How to spend the first 50%

So, as established, the biggest portion of your monthly income will be spent on your basic needs. But what exactly are those needs? These are the things you cannot live without. Think of your rent or mortgage for your place of residence. Your gas and electricity bill, insurance, transportation, and basic groceries for things like food and toilet paper.

In the example mentioned above, the budget for basic needs is €1000. If, however, you find that you can’t afford your basic needs with 50% of your monthly income, then it’s probably a good idea to try to lower some of those costs. Do you really need all those insurance? Can you find a cheaper one? Can you cut back on groceries or go to a cheaper store? Maybe even more drastic changes need to be made, such as moving to a cheaper home. Try to bring your basic needs costs down to no more than 50% of your monthly income.

### How to spend the 30% on wants

Once the basic living costs are covered, you get to the fun stuff. Money allows you to purchase the things you enjoy. Think of going out to eat, holidays, gifts, shopping for clothes, gym membership, and subscriptions such as Netflix and Spotify. How can you define a want? These are things that you spend money on but that, if you had to, you could live without.

Of course, it’s important to enjoy life and occasionally buy things you don’t need but that do make you happy. However, if you find that month after month, the expenses on your needs exceed your budget (more than €600 in the example above), then it might be time to see where you can cut back. It might be difficult to say goodbye to certain comforts and pleasures now, but future you will thank you.

### How to save 20% of your income

If you follow the 50/30/20 rule for one month, it might not seem like you’ve saved that much money. In the example above, it would be €400. But if you do this consistently over the years, then your savings will steadily grow. Following this example, you will have saved almost €5000.

Once you’ve got the hang of setting aside the money, the next question is: what do you do with the money you save? The first thing that comes to mind is probably a savings account. But these days, many savings accounts only provide 0,5% interest. With the high inflation we’re facing right now, being much higher than 0,5%, that means your money is actually becoming worth less over time when you choose to store it in a savings account.

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