Why use the 50 30 20 Rule?
The best budget is the one you actually stick to. And it’s easier to keep up with habits that are simple. It’s easier, for example, to walk 10,000 steps a day than it is to research the perfect workout routine, find a gym, go there, do the workout, and keep repeating that every day. That’s a great way to get in shape, but if you’re starting from nothing, taking a walk is definitely going to be easier. Many people are starting from nothing when it comes to budgeting, and the 50 30 20 Rule is one of the simplest budgets there is.
The 50 30 20 budget is simple
The common rule of thumb known as “50 30 20” is based on percentages of income, usually calculated on a monthly basis. With these guidelines, 50% of your income goes to needs like rent and groceries, 30% to wants like travel and Netflix, and 20% to savings. So if you make $5,000 a month after taxes, $2,500 would be spent on needs, $1,500 on wants, and $1,000 would go to savings.
The 50 30 20 Rule vs. other budgets
There are different types of budgets, and a few common ones in particular. Here’s how they compare to 50 30 20.
Pay yourself first - With this method, a certain percentage of income (usually 20%) goes directly from your paycheck into retirement accounts or other savings. If you contribute to a 401(k) set up through your employer, you’re already paying yourself the amount that goes into that account. The rest (~80%) is essentially free to spend.
Comparison: The “20” in “50 30 20” represents the same savings, but this method takes budgeting one step further by tracking needs and wants separately. Understanding the difference between those is an important habit to establish early on. “I need food; I want sushi.”
Cash stuffing / envelope method - Cash helps us visualize spending. Unlike credit cards, where a tap doesn’t really feel like money leaving your account, handing over physical cash hits different. Cash stuffing involves filling an envelope for each category (rent, groceries, restaurants, entertainment) at the beginning of the month and then spending it down over time. It can be a way to make sure everything is covered ahead of time.
Comparison: It’s a digital world, and keeping large amounts of cash can be impractical as well as risky. In contrast, the 50 30 20 Rule makes it easy to track payments digitally.
Zero-based budget - This budget is often described as “giving every dollar a job.” That means going through past spending to set up a specific amount for each category, in advance, and not going over that amount during the month. Zero-based budgets can be very effective, but most people need a strong motivation to keep up with the level of detail they require.
Comparison: Back to the first sentence of this post: The best budget is the one you actually stick to. Most people find the 50 30 20 Rule simpler to understand and much easier to put into practice.
No-budget floor - Many people who don’t use a budget will allow themselves to spend up to a certain point. When the balance in their checking account reaches a specific, low amount (the floor), they reduce their spending until the balance comes up again to a number they’re more comfortable with.
Comparison: By setting a target amount of 20% for savings, the 50 30 20 Rule provides a more specific goal than just keeping spending in check. We’re more likely to achieve goals when they’re specific, and establishing a saving habit adds up to a lot more in the long run.
Advantages of the 50 30 20 Rule
The 50 30 20 Rule is a good way to get started with budgeting. It highlights needs vs. wants and sets a specific savings target to aim for month over month. Knowing your monthly numbers can also help you plan for bigger purchases and financial goals.
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I never thought I needed a budget, because I didn’t overspend. Little did I know I was using the “no-budget floor” method. When my account got to $5,000, I would just stop buying anything extra until it came back to $7-8k. I could have saved more, but no one asked! It took me years to realize that my retirement savings would have grown much faster if I had contributed more money in the first few years of my career, because of the power of compound interest. One reason I had to start Brightfin was to help others not make the same mistake!