Understanding the 50/30/20 Budget Rule

Budgeting is an important part of maintaining a healthy personal finance. Through budgeting, you can keep your expenses under better control and stay true to your financial goals. Budgeting also helps you deal with financial difficulties, making it a handy tool to utilize when you are dealing with mounting debts and expenses.

One of the most popular budgeting rules is known as the 50/30/20 budget rule. This is a rule that can be applied in different situations. The goal of this rule is helping you achieve better financial control while securing a brighter financial future. Before we get to how you can achieve those goals, let’s take a closer look at the rule itself.

What do 50/30/20 mean?

The numbers 50/30/20 represent portions of your income. There are actually several variations of this budgeting rule, but we are going to stick with the more general view of personal budgeting for this article.

You start by allocating 20% of your income towards savings and investments. This is something you do immediately so that you always have a portion of your income saved or invested. It is a great way to build a better financial future.

30% of your income can be used for repaying debts or housing costs. This is where the variations of this budgeting rule stems from. While there are those who allocate the 30% towards all debts, some financial experts allocate this portion strictly for housing expenses, including paying your rent.

The remaining 50% can be spent on everything else. This includes monthly bills and everyday expenses. You are basically limiting your expenses to no more than half of your income. If you allocate the previous 30% only on housing, the 50% portion must also cover debt repayments.

The Savings

The 20% portion that goes towards savings and investments must be allocated as soon as you receive your pay check. The one thing you want to avoid is waiting until the end of the month before saving whatever money you have left.

By sticking with the budget, you are accumulating wealth. It may not be possible to invest this portion immediately, but you will have more investment instruments to use once you have enough in your savings account.

You can save smaller portion of your income if you are recovering from bad debts – we will get to this in a bit – or increase this portion to build your own emergency fund. The rule is flexible enough to account for specific needs too.

The Repayments

As mentioned before, we are going with the more general budgeting rule for this article. This means you can allocate 30% of your income for repaying your debts, including your mortgage or any loans you have via lenders like Omacl. Ideally, you want to keep your debt-to-income ratio well below 30% for a healthier cash flow.

If you are dealing with a series of bad debts, getting your debt-to-income ratio to the ideal level should be your priority. This may mean cutting your expenses and reducing the amount you save for the purpose of settling bad debts as quickly as possible.

You also want to consider your options if you are dealing with high debt-to-income ratio. For example, you can consolidate a number of expensive credit card debts into one loan that is cheaper and easier to manage. By saving on the cost of the loan, you will have a lower monthly repayment to deal with.

Once you have fewer debts to repay, allocate the extra money towards savings and investments. You will have more options when it comes to investing your money, allowing you to generate more income and continue to improve your financial future in a gradual way.

The Expenses

Last but certainly not least, you have the portion allocated for expenses. This too is flexible and can be adjusted to your specific situation. Similar to debt-to-income ratio, you want to keep your expenses-to-income ratio at 50% or lower.

Start documenting your expenses to see if you are spending more money than you can afford to spend. If that is the case, start eliminating non-essential expenses to get the ratio to its ideal level. In a more severe situation – such as when you have bad debts to repay – you can go a step further and stick with the bare minimum until your debts are more manageable.

Once your expenses are under control, you can further improve by allocating more of your income towards investments. Once again, you are boosting your income level by investing more, which means you can stick with a healthy budget easily.

Getting Started with Budgeting

Budgeting isn’t a difficult thing to do. The more you know about your personal financial state, the better you will be at allocating portions of your income for specific – the right – purposes. Now that there are apps and services that can help you manage your personal finance better, getting started with using the 50/30/20 budget rule is a walk in the park.