This is a common question every beginner asks themselves, and that’s where the 50/30/20 rule comes in. The 50/30/20 rule makes saving easy, realistic, and applicable. This rule tells you exactly how much you should be budgeting for your living costs and savings on a monthly basis.
This rule budgets your monthly income (after-tax) into 3 different categories. These include your needs, wants, and savings. It is an indication of what percentage of your income you should be spending on each category.
The 50 in the rule represents spending 50% of your monthly income on your living costs, also called your needs.
These “needs” are the expenses you need to survive.They include rent, groceries, insurances, transportation, gas/electricity/water bills, and minimum loan/debt repayments.
For example, if your income per month after tax deductions is $2000, you should budget to spend $1000 on needs.
The rule suggests that you budget to spend 30% of your monthly income on your wants. These can include shopping, eating out at restaurants, subscriptions such as Netflix or Disney Plus, vacations, etc.
This rule is easy to follow because while it does limit how much you spend on different things; it does not completely restrict you from treating yourself with wants.
For example, if your income per month after tax deductions is $2000, you should budget to spend 30% on your wants. Therefore, when using this rule you should be spending $600 on wants.
The 20% of the rule is budgeted for savings. This 50/30/20 rule allocates budgeting 20% of your monthly income towards savings such as investments, emergency fund, or extra debt repayments.
For example, using your $2000 income and this rule, you can budget for $400 for saving/investing.
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