The 50/30/20 rule in money management

50 30 20 money management rule

Budgeting doesn’t have to be difficult or take up a lot of your day. In actuality, the simplest budgeting methods are frequently the best. Consider the 50/30/20 rule as an example. The 50/30/20 rule is an easy monthly budgeting technique that outlines exactly how much you should allocate to savings and living expenses each month.

When it comes to budgeting, one common query is, “Why can’t I save more?” The 50/30/20 guideline is a terrific method to resolve the age-old conundrum and give your spending habits more structure. Whether you’re trying to pay off debt or save money for a rainy day, it might make it simpler for you to achieve your financial objectives.

What is the origin of the 50/30/20 rule?

In 2005, current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, published “All Your Worth: The Ultimate Lifetime Money Plan,” which is where the 50/30/20 rule first appeared. Warren and Tyagi draw the conclusion that you can manage your finances without a sophisticated budget based on more than 20 years of research. All you have to do is use the 50/30/20 rule to divide your income evenly between your needs, wants, and savings objectives.

What is the 50/30/20 rule?

The 50/30/20 rule is a simple budgeting technique that can assist you in managing your money in an efficient, straightforward, and sustainable manner. The general rule of thumb is to allocate 50% of your monthly after-tax income for needs, 30% for wants, and 20% for savings or debt repayment.

You may make better use of your money by consistently maintaining a balance between three key areas of expenditure. You can also save yourself the time and frustration of going into the specifics every time you spend by keeping track of only the three main categories.

How to set up a financial plan using this 3 step in 50/30/20 rule?

Budgeting is made easier by the 50/30/20 rule, which divides your after-tax income into just three categories: needs, wants, and savings or debt.

It will be simpler to stick to your budget and control your spending if you know exactly how much to spend on each category. Here is an example of a budget that follows the 50/30/20 rule:

1. Give 50% of your income to necessities.

Simply expressed, needs are costs you can’t avoid—amounts needed for all the necessities without which it would be challenging to survive. Your most essential expenses should be covered by 50% of your after-tax income.

Typical needs include:

  • Regular rent
  • Gas and electricity bills
  • Transportation
  • Insurances (for healthcare, car, or pets) (for healthcare, car, or pets)
  • Loan minimum payments
  • basic provisions

If your monthly after-tax income is €2,000, for instance, €1,000 should be set aside for your requirements.

This spending plan may vary from person to person. If you find that your demands total more than half of your gross income, you might be able to make some adjustments to reduce those costs. This could be as simple as switching to a different energy supplier or discovering new strategies for grocery shopping financial savings. It might also imply more significant life adjustments, like looking for a less expensive place to live.

2. Put 30% of your income toward wants.

Your most basic needs can be met with 50% of your after-tax income, leaving 30% of your after-tax income for wants. Wants are things that you choose to spend your money on even if you could live without them if you had to. They are considered non-essential expenses.

These may consist of:

  • Dine outside
  • purchasing clothing
  • Holidays
  • joining a gym
  • entertainment packages (Netflix, HBO, Amazon Prime)
  • Groceries (other than the essentials) (other than the essentials)

If your monthly after-tax income is 100000, for example, you can spend 30000 on your wishes. It’s also worthwhile to consider which of your wants you may cut back on if you find that you’re spending too much on them.

As a side note, adhering to the 50/30/20 guideline does not exclude you from having a good time. Finding areas in your budget where you are unnecessarily overspending is all that is required to become more frugal with your money. Simply ask yourself, “Could I live without this? ” if you’re unsure of whether something is a need or a want. “If the response is affirmative, that is probably a want.

3. Put aside 20% of your income as savings

The remaining 20% can be used to reach your savings objectives or pay off any outstanding debts after allocating 30% of your monthly income to wants and 50% to needs. Even though the minimum payments are regarded as necessities, any more payments are regarded as savings because they lower your current debt and accrued interest.

You may create a better, more enduring savings plan by consistently setting aside 20% of your monthly income. It doesn’t matter if your ultimate objective is setting up an emergency fund, creating a long-term personal financial plan, or saving for a down payment on a home—this is true.

Filipinos budgeting

Filipinos quickly dismiss the 50-30-20 guideline for two basic reasons. First, the cost of living in the United States and the Philippines are different, so the percentages may look absurd when compared with their requirements and capacity for saving.

Let’s assume that, as a recent graduate, your net monthly income is P18,000. Accordingly, P9,000 will be spent on necessities, P5,400 on wants, and P3,600 on savings. Rent, food, transportation, utilities, and other costs would cost more than P9,000 per month if you were to live independently and have no other sources of income. As a result, you would have to cut back on your savings and want spending, breaking the 50-30-20 rule.

Differences in culture are the second factor contributing to the lack of necessity for the 50-30-20 rule among many Filipinos. Most Americans are expected to move out of their parents’ house by the time they turn 18 or start paying their parents’ rent. However, young adults are not expected to leave the nest until much later in life in the Philippines since family ties are so highly prized there—that is, if they leave the nest at all. Because of this cultural gap, Filipinos have mixed incomes and are not entirely financially independent from the time they are young adults. They have unrealistic budget breakdowns or terrible spending habits when it comes time to move out, which makes it harder for them to stay inside a 50-30-20 budget. The frequent attribute of being “ningas cogon,” which is the mindset of performing well just during the beginning or the lack of prolonged perseverance in whatever goal, has an impact on how Filipinos save and budget. When it comes to sticking to a budget, Filipinos frequently make proactive resolutions to save more money, especially at the beginning of the year, only to retreat over time. For instance, receiving a sizable sum on payday typically provides a simple justification for treating oneself to expensive purchases rather than contributing to savings.

Moreover, the 50-30-20 rule in money management should be undoubtedly seen in the budgetary lifestyle of the Filipinos. This rule will definitely help them decide well with ease in terms of budgeting.

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Written by Bermon O. Ferreras