Budgeting: The 50/30/20 Rule

Budgeting: The 50/30/20 Rule

Do you want to manage your budget in the simplest way possible, without spending hours on it? There is an easy method: it is the 50/30/20 rule. This method allows you to distribute your money according to the type of expense: such percentage of your money will go towards such type of expense, and so on. We will see in this article how to implement the 50/30/20 rule.

What is the 50/30/20 rule?

This rule allows, using percentages, to allocate a budget according to the type of expenses. The 50 represents the percentage of essential and vital expenses not to be exceeded, the 30 represents the percentage of leisure expenses not to be exceeded either, and finally, the 20 represents the percentage of savings to be set aside.

Example: An employee earns 1500€/month.

50% of vital expenses = €750 maximum to be allocated to this type of expense.

30% for leisure = €450 maximum to be allocated to this type of expense.

20% for savings = €300 minimum to allocate to your savings.

He must therefore spend a maximum of €750/month for his expenses, €450/month for his leisure activities and save at least €300/month.

Now, with this example, you have understood this rule. We will therefore see how to put it in place in practice and define where the expenses go.

50% vital and compulsory expenses

Vital expenses are all the expenses that we are obliged to make to live each month:

  • The rent.
  • Food.
  • Electricity.
  • The insurance.
  • Taxes.
  • Transportation costs.
  • All samples.
  • Internet and telephone subscriptions.

It is, therefore, necessary to be careful not to exceed 50% to stay in the nails. To find out how much you are, just add up all your charges. You can do this on a budget management application like “Linxo”.

For example, thanks to this type of application, you have a view of all your expenses and you can categorize them quickly. So you quickly see whether or not you exceed 50%. You can also use one of your bank statements, all your expenses are noted there. Have a view of at least 3 months and average your expenses. Indeed, depending on the month, certain expenses may vary, especially for everything related to food. Once you have your expenses, you will simply add them up and it must not exceed 50%. Here is the calculation to do to calculate the percentage:

(100 x 1150) / 2300 = 50%

If you’re not good at math, just tell yourself that 50% is half your income. Thus, if you win €2300, you must not exceed €1150. By adding up your expenses, you will quickly see whether or not you have exceeded this 50%.

30% leisure expenses

These are all the expenses we make to please ourselves:

  • holidays,
  • restaurant,
  • visits (amusement park, zoo, etc.),
  • shopping (clothing, decoration, etc.),
  • gym membership (considered as leisure),
  • Spotify subscription.

Again, you’ll be looking at your bank statements or your Linxo budget management app. You will do the same calculation:

(100 x 690) / 2300 = 30%

If you’re not good at math, just tell yourself that 30% is 3×10%. Knowing that 10% (that is to say one-tenth), that’s 230€, so you have to do 230 x 3 = 690€.

20% savings

Unlike other types of expenses, this 20% is a minimum. The more you can save, the better:

  • ELP,
  • life insurance,
  • retirement savings plan,
  • PEA,
  • A booklet.

These savings will be able to be used to repay your debts, buy a car, etc. For my part, I divide the savings into 2 areas: fixed savings and mobile savings. Of the 20% that you are going to save, I advise you to leave half of it on media on which you will be able to withdraw the money quickly, such as the livret A or the LDD; and the other half on media where the money is more or less blocked, such as the PEL or life insurance.

To know: If you are an owner, you repay a loan every month. The amortized capital part can then be considered as savings (you must also put the draft in the vital expenses category), it is a good way to motivate yourself to save even more. You will take your monthly loan payment and remove the interest: the part of capital amortized each month can then be added to your savings (virtually). Of course, on top of that, you still have to put your 20% aside.

Once you know how much you can spend according to each type of expense, you will have to respect the rule on the length. I will give you some techniques to do this.

Pay for leisure in cash

Most expenses are fixed, that is, they do not vary from month to month. Expenses that can vary and weigh down your budget are leisure and shopping. A good way to stay within your budget for these expenses is to withdraw the money. By paying in cash, you have the money in your hands, so it’s more tangible and you realize your expenses more easily than with a bank card. Indeed, when you pay with a bank card, sometimes you don’t even see the amount… and it’s even worse with contactless payment! Sometimes, we also throw away the receipt, we lose it… Above all, the payment is made on your accounts sometimes up to 1 week later! This means that if, for example, you forgot the purchase you just made, and a few days later you buy something else, this can contribute to not respecting your budget. With cash, you can see where your budget is on a day-to-day basis.

Buy your groceries at the drive-thru

Honestly, since I’ve been doing this, my shopping budget has always been the same, except for a few euros. Indeed, by buying at the drive, you almost always buy the same thing. In addition, you are not tempted to buy something else, your children do not ask you to buy the whole store, and icing on the cake, you save a lot of time since your basket is registered! So you can do your shopping in one click: you no longer go to the supermarket, you just have to pick them up and take them home.

There are many other ways to reduce your expenses… I have also grouped together several of them in this article: 16 tips for reducing your expenses.

Set up automatic transfers for your savings

Very often, we tend to save at the end of the month… Except that at the end of the month, there isn’t much left! It would be wiser, in order to respect the objective of 20% savings, to set up an automatic transfer. Let’s imagine that your salary arrives on the 5th of the month: you will set up 2 automatic transfers, so you won’t need to think about it every month and above all, you won’t forget it. Half will go to your landline savings and the other half to mobile savings.

What are the benefits of this rule?

The advantages of this rule are that it is very easy to understand, that the calculations are very simple to implement and that once the method has been implemented, you no longer need to regularly check your accounts. This rule also allows you to please yourself since 30% of your expenses are allocated to leisure. Eventually, you will be able to classify each type of expense into the 3 categories: needs/wants/savings.

The limits of this rule

In my opinion, this rule makes it possible to begin to learn about budget management, but it is not a sharp method in the long term to manage your budget well. Indeed, to manage your budget well, you have to know how to calculate your budget (…), list all your expenses, reduce your expenses, etc. This requires more work and you must also be able to regularly control your expenses. So there are even more advanced methods! Well, this rule actually allows you to get your feet wet…

The 50/30/20 rule: a bit of history!

This rule was created by Elizabeth Warrenformer Harvard professor now vice president of the US Senate. She was named one of the 100 most influential people in the world by TIME magazine.

Your turn! Have you ever tried the 50/30/20 rule? What did you think of it? React in the comments!

Leave a Comment

Your email address will not be published.