This rule is a popular guideline for budgeting personal finance. It was introduced by Elizabeth Warren, a Harvard bankruptcy expert, and her daughter Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan.” The 50/30/20 rule suggests that you should allocate 50% of your after-tax income to your needs, 30% to your wants, and 20% to your savings and debt repayment.
50 % needs
The 50% of your income that is allocated to your needs should cover essential expenses such as housing, utilities, groceries, insurance, and transportation. These are the expenses that you can’t do without and that are necessary for your basic survival. This is the possible section where you can save money.
30 % wants
The 30% of your income that is allocated to your wants should cover non-essential expenses such as dining out, entertainment, travel, and shopping. These are expenses that you can live without and that are not necessary for your basic survival. For keeping a good overview of all your expenses we can recommend our article on personal budget.
20 % save and invest
The remaining 20% of your income should be used for saving and debt repayment. This includes saving for emergencies, retirement, and other long-term financial goals, as well as paying off any debt such as credit card balances, student loans, and car loans.
Benefits of the 50/30/20 rule
One of the benefits of the 50/30/20 rule is that it provides a simple and easy-to-follow guideline for budgeting. By following this rule, you can ensure that you are meeting your basic needs, indulging in some of your wants, and also saving and paying off debt.
Another benefit of the 50/30/20 rule is that it helps you prioritize your expenses and make conscious decisions about how you spend your money. By allocating a certain percentage of your income to your needs, wants, and savings, you can ensure that you are not overspending in any one area and that you are making progress towards your financial goals.
Criticism on the method
There are some criticisms of the 50/30/20 rule. One criticism is that it does not take into account individual differences in income and expenses. For example, someone who lives in a high-cost-of-living area may need to allocate a larger percentage of their income to their needs, while someone with a lower cost of living may have more flexibility in their budget.
Another criticism is that the 50/30/20 rule does not account for the fact that people’s expenses and income may fluctuate over time. For example, if you have a temporary increase in income, you may want to allocate a larger percentage of your income to your savings and debt repayment. Or if you have a temporary decrease in income, you may need to allocate a larger percentage of your income to your needs.
Conclusion
Despite these criticisms, the 50/30/20 rule is still a useful starting point for budgeting personal finance. It provides a simple and easy-to-follow guideline that can help you prioritize your expenses and make progress towards your financial goals. If you find that the 50/30/20 rule does not work for your individual situation, you can adjust the percentages to better fit your needs and goals.
