This rule divides your money into three categories based on your after-tax income. The rule was coiled by then-professor Elizabeth Waren in her book “All Your Worth: The Ultimate Lifetime Money Plan.”
This rule of budgeting is a simple and effective blueprint for managing personal finances.
It divides your after-tax income into three main categories, as follows:
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1. 50% -for needs:
You should allocate 50% of your after-tax income to cover your essential living expenses. They are the mandatory expenses that are required for daily living and maintaining basic well-being, so you should give them a large percentage of your after-tax income share.
2.30% -for wants.
When you allocate 30% of your after-tax income to wants, this will allow you to enjoy discretionary spending on non-essential items and some activities that enhance your lifestyle. These are expenses that are not necessary for basic living but provide enjoyment, convenience, and comfort.
Expenses that fall under this category include dining out, vacations, and subscriptions like streaming services.
This 30% allocation of your after-tax income helps you maintain a balanced budget that supports both your present enjoyment and future financial stability.
3.20% -savings and debt repayment.
This portion of your budget is dedicated to improving your financial health by saving for the future and reducing debt.
Here is a detailed breakdown of typical expenses and goals that fall under this 20% of saving and debt repayment.
a) Savings.
You can have emergency fund savings, retirement savings, high-interest savings, and some more.
b) Debt Repayment Portion.
By allocating this portion of your budget specifically for debt repayment, you can systematically reduce your financial liabilities and move closer to achieving financial independence and stability.
The debt repayment includes paying for mortgage principal payments, personal loans, and credit card debt.
When you follow the 50/30/20 rule of budgeting, as explained above, it will help you manage your finances properly.