budget with the 50/30/20 ruleBudget with the 50/30/20 Rule.

The 50/30/20 represents the percentages that a budget should be broken down by. It’s well-known that breaking down a plan into smaller, more easily achieved goals will get you to the finish line faster. So let’s break it down!

A budget is defined by the amount of income and expenditures for a set period of time. It’s a record of how much money is coming into your account through your income. Then the amount that’s spent is the more important part of that budget.

The 50/30/20 Percentages.

Under this plan, the budget should look like this:

  • 50% to needs
  • 30% to wants
  • 20% to savings or to debt repayment

This budget is great for beginners who are just entering the personal finance world. It’s not out of the question though for the wants to 20% and the debt repayment to be 30%. If a family has small children this could increase the needs category because of the cost of childcare. The first step is to record all expenses and give them a category: need, want, or savings/debt repayment.

How do to determine if something is a need or a want.

Some categories will be easier to determine. Rent or a mortgage payment is a need. But ordering take-out for dinner is definitely a want. But what about the internet or cellphone plan bills? These can be harder to define because every family is different. Many people can’t work or learn without the internet, or stay in touch with the babysitter without a cellphone plan. These fall into the need pile in this instance.

Needs versus debt repayment can also raise some questions. A car loan payment can be a need. In some areas, a car is necessary to get to work. When the loan isn’t repaid then there’s a risk of financial hardship. But a car loan is also a debt that needs to be repaid. In this example, the car loan would fall under the 20% debt repayment plan. This is an easier way to keep debt under control too. Taking out a personal loan to use the cash on a family vacation with the debt payments section of the budget are already 20% creates a risk of going too far into debt.

When you budget with the 50/30/20 rule, it’s an easy way to pay all bills and expenses on time and in full, or pay off debt quickly. If you don’t have any debt in your budget, you’ll be saving 20% of the total income in your share account or money market account. Imagine how fast it will grow!