See How the 50/30/20 Rule Really Works in Your Life

Stabilizing and balancing your finances isn’t exactly easy, is it? 

Managing all your income and expenses requires a lot of effort, especially mental work, to gain a clear understanding of where you want to go. 

The good news is that many people have already walked this path, which has led to the creation of a variety of strategies to help you achieve better financial health. 

One particularly interesting strategy is the 50/30/20 rule, designed to help you build secure investment and emergency funds. 

Here’s a breakdown of the rule and tips on how to apply it to your daily life without much hassle. 

What is the 50/30/20 rule? 

The 50/30/20 rule is a relatively simple financial strategy for managing your money. It is typically applied to your after-tax income. 

This means you should focus on your net income—the money available for spending—rather than your gross income. 

The rule divides your spending into three categories, each representing a percentage of your income. 

50

Half of your income should go toward needs—the essential expenses required for living. 

This includes rent or mortgage payments, utilities, groceries, healthcare, education, and other necessary bills. 

30

According to the rule, 30 percent of your income is allocated to wants—things you choose to spend money on for enjoyment. 

This category covers entertainment, dining out, new clothes, vacations, subscription services, and similar discretionary expenses. 

20

The remaining 20 percent should be directed toward savings and investments. 

This includes emergency funds, investment accounts, or saving for significant goals like a home down payment. 

How to define each category? 

The first challenge in applying the 50/30/20 rule is accurately identifying what falls into each category, as there can sometimes be overlap. 

The easiest category to define is the 20 percent, as this is money you will save or invest. It includes contributions to emergency funds, investment portfolios, or funds for major purchases. 

A helpful tip is to set aside this 20 percent before spending on anything else, ensuring your savings and emergency funds are prioritized. 

What’s the difference between needs and wants? This distinction can be a bit tricky, but here’s a simple way to approach it: 

Needs are things you cannot live without or that significantly impact your quality of life. 

Wants, on the other hand, are nonessential expenses that improve your psychological well-being and quality of life. 

Ultimately, the exact definition of what fits into the 50 and 30 percent categories will vary from person to person, and over time, you’ll learn to make better decisions. 

How to apply the 50/30/20 rule in daily life? 

The 50/30/20 rule is a strategy for creating your budget because it helps define financial goals. 

By allocating your spending based on your income, you determine where each portion of your money will go. 

The 50/30/20 rule serves as a framework for dividing your budget, guiding how you manage your expenses.

Ideally, you should stick to the limits set for each category. This rule acts as an important guide to help you maintain financial stability. 

Can you save more than 20 percent? 

At certain points in life, particularly when investments become a priority, you might choose to allocate more than 20 percent of your income to savings or other funds. 

This requires an overall adjustment to your strategy, often involving a reduction in other expenses. 

This is likely to happen at various times, but it’s essential to strike a balance. Cutting too much from discretionary spending could lead to significant stress, so maintaining a healthy equilibrium is key. 

How to use credit with the 50/30/20 rule 

Credit cards can be incorporated into the 50/30/20 rule. You can use them to cover expenses in the needs category (50 percent), the wants category (30 percent), or even both—or choose not to use them at all. 

Some people prefer to charge essential living expenses to their credit card, while others use credit solely for discretionary spending. 

Ultimately, the best approach depends on your personal preferences, but it’s always important to maintain a healthy relationship with your credit limit to ensure financial well-being. 

Written by

Gabriel Gonçalves