Every month you swear to yourself to save money? Like many French people, you find it difficult to budget your expenses. We may have the solution: the 50 30 20 rule.
In this article :
In brief :
What is the 50 30 20 rule
Widely popularised by Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan, the 50 30 20 rule is about dividing your spending into three categories: 50% for your needs, 30% for your wants, 20% for your savings.
How do you implement the 50 30 20 rule?
Add up all the income you accumulate in a month, then classify it as spending, needing or saving. Adjust these expenses on a daily basis to ensure that you respect the distribution.
The 50 30 20 rule : a method for managing a balanced monthly budget Your Heading Text Here
50% of the budget for needs
50% of your income must be spent on what are called “essential” expenses.
In concrete terms, you cannot avoid them, they are essential or even vital for a normal life (if you manage to live without them, let us know). Ideally, they should not cover more than half of your monthly budget.
These expenses concern needs such as
- Bills (electricity, gas, internet, etc.)
- Insurance (car, home, health, etc.)
- Transport (metro, bus, train, etc.)
- Repayment of your loans and debts
You earn €1,800 net per month and your rent costs €1,000? Ouch, the 50 30 20 rule requires you to reduce the expenditure linked to this need so that, combined with all your other essential expenses, you do not exceed the sum of €900 per month.
30% of the budget for desires
Cravings are expenses considered non-essential and include everything that gives you pleasure. This is why desires fluctuate and change from month to month.
Because they depend on your wishes and desires, these expenses can be adjusted and you can act on them.
Expenses linked to desires include
- Outings (restaurant, cinema, other activities)
- Leisure activities
- Clothing, shopping
- Entertainment subscriptions (Netflix, Spotify…)
When a person is trying to apply the 50 30 20 rule and control their spending, it is on the desires that they will work first.
Cravings appeal to your emotions, which can generate impulsiveness on your part:
“You know you don’t necessarily need to buy those new shoes, but they are fashionable and you really like them.”
“You know it’s not sensible to go to that fancy restaurant for the evening, but all your friends will be there.”
If you can manage the emotional dimension when an expense falls into the category of wants, then it will be quite easy to manage your budget better.
With a monthly income of €1,800 net, your expenses considered as wants should not exceed the €600 threshold per month.
You shouldn’t deprive yourself of everything. The 50 30 20 rule offers you tips to be more responsible with your budget by controlling your spending. Make those cravings into rewards. For example, if you’ve made good progress on your projects or work this week, reward yourself with an expense craving
20% of the budget for savings
Finally, the remaining 20% of your monthly income should be spent on savings.
Saving does not simply mean saving by transferring money to your savings account. With the 50 30 20 method, investment is also included in this 20% as it is not money spent directly on your needs or wants.
The products that fall into the savings category are
- Savings products
- CTO (Cease Trade Orders)
- Real estate investment
- Private Equity (investment in non-listed companies)
- Investment in crypto-currencies, decentralised finance
If you follow the 50 30 20 rule by saving 20% of your monthly budget, you will be surprised at the amount of money you will manage to accumulate after a few years.
With an income of €1,800 net per month, 20% of your monthly budget would be equivalent to saving €360. Over the course of a year, that’s €4,320! More than €4,000 just by applying the 50 30 20 rule, without investing your money.
If you really want to spend less: try the 5 pound challenge.
How to implement the 50 30 20 rule ?
We have seen the 50 30 20 rule in theory. But how can you actually put it into practice and apply it to your budget? We explain it step by step.
Know your income, calculate your expenses
To control your finances and your budget you need to know what you have.
- Start by adding up all the income you accumulate in a month.
Salary, bonuses, pensions, dividends, rent, state aid, etc. Calculate to the nearest dollar the net tax receipts that will be available in your bank accounts over a one-month period. Be careful about the gross/net distinction, in terms of salary it changes a lot, it’s even worse for non-salaried income.
- Identify and add up all the expenses accumulated over a month
Very simple to calculate, very effective for scaring yourself. You add up all the outgoings that your bank account experiences in a month.
Apart from the expenses linked to needs (which are fixed overall), your desires will vary the total expenses that you will experience throughout the year. In this case, make an average: add up all the accumulated expenses of the year and divide them by 12, you will obtain roughly what you spend in a month.
The 50 30 20 method can be combined with the famous Japanese small notebook : the kakeibo, a real little account book that will help you manage your budget.
Classify the expenses among the 3 categories
As far as needs are concerned, it’s relatively simple: rent, food shopping, bills, insurance… You won’t have much trouble identifying them.
As far as desires are concerned, it is more complex. If you can identify going out, restaurants and other leisure activities fairly easily, it can be difficult to categorise expenses such as a birthday present, a gym membership or a cultural activity. To keep things simple, we recommend that you categorise as wants anything that does not prevent you from living at all.
Finally, if you are reading this article, you probably already know the answer to the question of savings (in which case we think you already know the amount to the nearest dollar).
Managing expenses and applying the 50 30 20 rule on a daily basis
How can you optimise the management of your daily budget ? Now that you have understood the 50 30 20 rule, you need to put it into practice. Here are some tips.
One simple tip is to have several bank accounts for your finances (ideally 3 accounts), representing your needs, desires and expenses.
Main bank account : this is where most of your money goes, where you receive your salary or main income. 50% of your income stays in this account. It just allows you to collect your income and pay (usually by automatic transfers) for all your needs: rent, bills, insurance, food shopping.
Second bank account : this is where you deposit the 30% of your income that you use to satisfy your desires. This account is funded from the main bank account. The money deposited in this account is only used to finance your so-called pleasure expenses. Having a bank account dedicated to your hobbies will allow you to have a clear view of how much they cost you every month. Moreover, if it is empty, it will be much more difficult for you mentally to use one of your other accounts.
Third bank account or savings account : this is the account where you will deposit the 20% of your monthly savings. You don’t have to touch the bank account, it is funded every month with an automatic transfer from your main account.
Don’t pay for a bank card for each of its accounts! The third account does not need one at all because no money is taken out. You can even avoid taking out a debit or credit card for the main account if you pay for your food shopping with another means of payment (cheques, luncheon vouchers…)
Changing the 50 30 20 rule to suit your budget
The 50 30 20 rule is a good basis to start with. It is obvious that with changing (positive) income the 50 30 20 rule will lose its logic and interest.
If your income is €10,000 a month tomorrow, 50% of that income will be far too much to cover your needs. It’s up to you to adjust, will the extra income fit into the wants category to enjoy more? Or will you save and secure this money in the savings category?
Even without an increase in your monthly income, after a few years the 50 30 20 rule may become obsolete for your situation. If you have achieved your life goals thanks to the savings you have accumulated (you can retire earlier, you have bought your house, etc.) it may be logical to want to drastically reduce the savings part and put some of it into spending.
Criticism and limitations of the 50 30 20 rule
While the 50 30 20 rule can help many people get off to a good start when it comes to managing their monthly budget, there are several limitations to the method’s answer.
The 50 30 20 rule with high incomes
As we discussed in the previous paragraph, applying the 50 30 20 rule when your monthly income starts to become more than comfortable doesn’t really make sense anymore.
Buying a big house, feeding yourself exclusively with top quality food, buying and insuring your sports car, going out to star restaurants… Unless you embrace this lifestyle, your needs and wants will not grow at the same rate as your income.
Needs or wants? A blurred boundary
Some expenses will be difficult to categorise as needs or wants.
Depending on the person, some wants may be needs. Take for example the case of a gym membership, in theory it is only a desire, you can live without going to the gym. But the benefits of sport on the body are no longer to be proven, it can even be a real need when you practice a discipline seriously.
A music or movie fan might have the same thoughts about subscribing to a streaming platform or a movie theatre. Basically, both can do without these leisure activities for a living. But this may be at the expense of their mental health, their daily well-being.
So it’s up to you to determine your goals: which expenses are purely out of envy and which are out of a deeper need in your life.
In the event that you are forced to classify an expense categorized at first as a want but it is a vital need, divide the price of that expense in half and divide each half into needs and wants expenses.
When it comes to budgeting, habits make the difference! Start now to get used to dividing your budget properly. Be aware of all your outgoings, sort them and use several accounts to help you get a clear picture of your monthly expenses. Finally, don’t forget to adapt the rule to the evolution of your income.
Passionate about savings and investment topics. I modestly try to offer you simple, sometimes not so simple, solutions to beat inflation.