What is the 50 – 30 – 20 Rule? Learn how to use your money wisely

A Rule of 50 – 30 – 20 promises to help you organize your financial life once and for all.

Therefore, if you are tired of experiencing difficulties because you spent all your salary on non-essentials, it is worth knowing this strategy to change things, and thus achieve financial success.

Below we will understand the concept and see how its application works in practice. Continue reading and check it out!

How does the 50 – 30 – 20 Rule help in your financial life?

Only those who have dealt with financial disorganization know the difficulty of balancing finances between obligations, fun and reserves.

Some adhere to total freedom, and end up spending more than they should on superfluous items. In the end, they end up in debt and with serious problems with essential expenses.

On the other hand, there are those who do not allow themselves to have pleasant experiences because they think that all money should be used for bills and reserves. As a result, they end up unhappy.

And, if you don’t face any of these cases but have no idea how you could create a financial reserve since you have nothing left over from your salary, this is also a scenario that requires changes.

Whatever your reality, Rule of 50 – 30 – 20 promises to help with financial organization, as it proposes a division scheme for each spending sector.

So, with this rule you don’t have to worry about running out of money for expenses, or for fun, as each percentage of income is allocated to a specific sector.

For many people, this is a faster and more practical way of organizing finances, as it proposes a division into 3 parts: expenses, fun and reserves.

In the next step we will understand how this works in practice.

Read too:How to build an emergency fund – SpreadKnow.

See how the Rule of 50 – 30 – 20 works

In the previous topic we saw that the Rule of 50 – 30 – 20 proposes a simpler way to organize finances.

This is because the rule divides the monthly budget into 3 parts: 50%, 30% and 20%, and each of them refers to a spending sector.

The idea is that you use your income intelligently, prioritizing important expenses, but without giving up flexible spending and financial reserves.

See below how each sector should work in practice:

50% – mandatory expenses

Many people face financial problems because they forget about expenses such as rent, energy bills and car insurance payments. 

Already Rule of 50 – 30 – 20, there is no chance of this occurring, as 50% of the monthly income must be allocated to paying this type of expense.

The idea is that you try to concentrate your essential bills within this spending limit, so, if your energy bill is very high, it is possible to adopt strategies to reduce consumption to keep expenses within 50%.

The same goes for the decision to hire a more expensive or cheaper service: check if this would fit within the limit of 50% of your salary, if so, it’s worth hiring, if not, it’s better to evaluate other proposals.

30% – flexible spending 

The second part of Rule of 50 – 30 – 20 is intended for flexible spending, and must be within the limit of 30% of the monthly budget.

When we talk about flexible spending we refer to expenses that are not essential or mandatory, and could be avoided if necessary.

For example, if you usually go to a bar every week to see your friends, this is a flexible expense, as although it is very pleasurable, it can be avoided or even replaced with something cheaper.

Therefore, set aside 30% of your income for free spending, in order to guarantee fun, entertainment and good times in your days.

20% – debts, reserve or investment

For a balanced financial life, it is essential to set aside part of the monthly budget to cover financial solutions.

In this case, we refer to paying debts, building a financial reserve or even investments and investments.

The idea is that in Rule of 50 – 30 – 20, 20% of your monthly income is allocated to these purposes. These practices help to achieve financial improvements, so they should be part of your financial organization.

20% – Debts, reserves or investment: which is the best thing to do?

When we talk about the last part of Rule of 50 – 30 – 20, it is common for many people to have doubts about what to do with the 20% money.

This is because there is a big difference between paying debts, creating a financial reserve and making investments. Each of these practices has a specific result.

The idea is that each of these practices is a phase, so it would work like this:

• If you have debt, you should prioritize paying off debt in the first few months. So, use the 20% for this purpose.
• After paying off your debts, it is important that you have a financial reserve for unforeseen events or emergencies. So, if you already have a clear name, in the first few months, invest in building a reserve with that 20%.
• Finally, if you already have a good financial reserve, start investing that 20% in good investment options.

This way you can build a healthy and stable financial life.

Is it worth using the 50 – 30 – 20 Rule?

There are countless strategy options for organizing finances, and one of them is Rule of 50 – 30 – 20. Is it worth using it?

As we have seen, this option proposes dividing the monthly budget into 3 parts, which are essential for achieving a balanced financial life.

The great advantage of this option is that it is practical and can be useful even for those who have difficulties with the finance sector.

Therefore, if you are looking for ways to organize your monthly income, it is certainly worth testing the Rule of 50 – 30 – 20.

FAQ

1. What is the 50 – 30 – 20 Rule?

The 50 – 30 – 20 Rule is a budgeting strategy that divides your monthly income into three categories: 50% for mandatory expenses, 30% for flexible spending, and 20% for debt repayment, savings, or investments. This rule aims to help individuals manage their finances more effectively by providing a simple framework for allocating income.

2. How do I use the 50% allocation for mandatory expenses?

The 50% portion of your income should be dedicated to essential expenses such as rent, utilities, insurance, and loan payments. This allocation ensures that you cover all necessary bills without compromising your financial stability. If your essential expenses exceed this limit, consider finding ways to reduce them or adjust other categories accordingly.

3. What qualifies as flexible spending under the 30% allocation?

Flexible spending includes non-essential expenses that enhance your quality of life, such as dining out, entertainment, and hobbies. While these expenses are not critical, they contribute to your overall well-being and enjoyment. This category allows for personal indulgences while keeping your budget balanced.

4. How should I use the 20% allocation for debts, reserves, or investments?

The 20% of your income should be allocated to financial goals such as paying off debt, building an emergency fund, or investing for the future. Prioritize debt repayment first if you have any. Once debt-free, use this portion to build a financial reserve for emergencies, and eventually, consider investing to grow your wealth.

This might interest you: 7 Tips to Stop Procrastinating at Work – SpreadKnow.