The 50/30/20 Rule of Money Management

There is never a better time to figure out how to manage your money better, especially at the beginning of a new year. However, we could be halfway or three-quarters already into the year.

It really does not matter when it comes to picking up some really useful money management tips to help you get a grip on your finances. Anytime you decide to manage your money well is a great time. It’s the best time.

So in this article we’re sharing with you how to manage money using what’s called the 50/30/20 rule of money. This is a very important concept to understand especially if you’ve ever found yourself in a position where you want to save more money.

Or you want to invest more of your money but you’re just not really sure where that’s going to come out of your budget. How are you going to be able to start putting in 20, 30 or 40 percent of your income into a savings or an investment account so you can start to have money working for you.

Learning how to manage your money better and investing a good chunk will also potentially help you retire earlier. You can afford to pay for your kids college and you can afford to buy a new home in the future, just to name a few. So there’s a lot of reasons why you’d want to save and invest your money.

How to Manage Your Money – Understanding the Rule

So let’s get started with the 50/30/20 rule of money. It’s been around for quite some time and for the most part it’s a really helpful idea and tool that you can use in order to build wealth.

There are some critiques on this method and I’ve discussed some of the downsides or some of things that you want to just be very careful of if you’re going to follow this money management strategy to structure your finances.

However, overall it’s definitely something that in most cases is going to put you in a much better financial position than you would be otherwise if you weren’t using it. So with that out of the way let’s get into the details.

 

Some Important Housekeeping

Before using the 50/30/20 money rule, it’s important to get the these three housekeeping tips.

1. Know your post-tax income

So the first step in finding out how to manage your money using this rule is have the clearest picture of your current financial standing. You need to calculate your post tax income.

So to do this simply just look at your pay stub and look at how much money is coming into your bank account after taxes.

For most people so you’re probably going to be getting taxed before your salary hits your checking account. Your employer is going to be withholding a certain amount of money for taxes.

So if you’re making $50,000 per year, you might only see $40,000 per year actually coming in to your bank account. Thanks you Uncle Sam and the government for taxing us.

2. Add non-tax deductions

So the next thing you need to do is add back any non-tax deduction. So we’re talking about healthcare or health insurance or if you’ve been making deductions for 401Ks, IRAs or some other type of retirement accounts, then add that back into the equation.

3. Ensure you’re running a budget

Finally you want to be you want to make sure that you are running a budget at all times. Running a budget will help you track where your money is coming in and where it’s going out, so that you’re able to really see where you stand financially.

How to Manage Your Money With the 50/30/20 Money Rule

Once you do these three things above that’s when we can actually start talking about the 50/30/20 rule of money.

Your Needs Should Take 50% of Your Money

The first thing you need to understand is that the 50 stands for 50% of your money and it goes towards your needs. Now this amount is a guideline. It isn’t to say that by all means this is exactly what you should be doing if you’re following the method.

It should be something that you should be shooting for and hoping to get your needs down to about 50% of your income.

The reality is that if you’re making $8 an hour, it might be very difficult to get your needs down to 50% of your after-tax income. It may be a little bit more possible if you’re making 15, 20 or $30 an hour and also depending on where you live currently. The idea here is that 50% of your income is going towards needs.

It’s very essential to be clear of what the needs are in this case. When we talk about needs, we aren’t referring to the best school district in the county. It’s not about a really nice condo somewhere.

We’re talking about something that gets a roof over your head. Food is the next need. Now some people spend a lot of money on food because they’re always eating out. People also spend a lot of money on groceries. If there’s a way to spend less money on groceries, that will be great.

Obviously we all need food and need shelter to survive.

The next need is healthcare and this is very important. Regardless of your income you should not be skimping on healthcare because the truth is if you don’t have good health, you’re probably not going to be around for a very long time. So take good care of yourself.

Utilities is also an important need because you don’t to have your power supply, water, and gas cut off. You also don’t want to to evicted from your home.

The other important need is paying the minimum payments on your unsecured debts such as credit card debts. Making sure to meet the at least the minimum payments on these such as student loans is very important. If you default on them, it would affect your credit rating and that’s not a good thing.

 

30% of Your Income Goes to Wants

According to the 50/30/20 money rule, 30 percent of your income should be going towards your wants. There’s a very large difference between needs and wants. As far as wants go there are about 5 categories of items that fits into wants for most people.

Your wants may be different but we’re looking at things that you don’t absolutely need to survive. Wants include but not limited to:

Clothing: obviously you shouldn’t be running around downtown completely nude because you want to save money. You’re probably going to get arrested if you did that. But the truth is clothing doesn’t have to cost a lot of money.

If you’re really in a financial pinch, you could go to the Salvation Army store or something similar and get some clothing for fifty cents or a couple of dollars. You could really save on clothing by budgeting $20 a month on clothing.

Phones: Phones aren’t necessary to keep you alive that’s why they are classified as a want and not a need. However these days we have to understand that phones are pretty important in life.

Everybody has a phone and in some cases you can’t even really function without your phone. You need your phone to do some many things order an Uber or find your way around town.

Restaurants: If you eat out a lot then restaurants is a want. It means that you’re paying for groceries and other food stuff like rice, beans, potatoes and vegetables and fruits.

Entertainment and vacations. These may not seem like they are important but under this rule, 30% of your income goes to this. You don’t a life that looks like you’re living in misery. But you need to do is to tweak your spending to fit these depending on your lifestyle.

Track your spending by having a budget so you know where your money is actually going.

 

Savings and Investments – 20%

The final part of using this money rule in how to manage your money is that 20% of your income goes to savings and investments. For this portion of your money, you looking at putting the money into your IRA, 401K, debt repayment and emergency fund.

Depending on who you are and where you live, you could actually switch this around and invest/save more by putting 30% of your income into investments and putting 20% towards your wants.

But if you can get to at least 20% I would argue that you would likely be in a much better financial position than most people today. The truth is most Millennials are not anywhere near this percentage.

And heck even if you just suck at money management and investments and putting everything into your 401k or maxing it out you’re probably going to be in a much better financial position still.

Now debt repayment is important because when you look at whether you should pay off debt or invest I’d like to think of both of these really as something that is beneficial for your finances overall.

For the emergency fund, we explained why it’s important to have at least close to six months worth of emergency fund that you can live off of if you get laid off from your job or something happens and you have to pay some very expensive medical bills. These are all incredibly important.

Conclusion

So that’s how to manage your money using 50/30/20 rule. It’s important to think of it as a guideline. Now depending our personal situation, you can flip these ratios or percentages around to 50/20/30 rule if you have enough wiggle room that will help you save more money and thereby invest more.

This will work best if you’re not living in expensive city like New York or San Francisco. That little tweak can quite literally shave years off of your projected retirement dates. So that instead of retiring at age 63 like the average American, you might be able to retire at age 55 maybe even age 50 or earlier in some cases.

I’m not saying you should live like a miser and not have any fun at all in your life. Overall look you do want to spend some money on your wants and go on vacation sometimes but make sure that you’re budgeting for that.

Make sure that you are buying things that you do enjoy. If you love playing music go buy a guitar. Don’t deprive yourself of some of these things but make sure you have this very well laid out so you know you’re focusing on the important things that will serve you well when you’re older.

Got any comments, questions or recommendations on how to manage your money using this rule? Use the comments section below and make sure to share so that as many people as possible would benefit and put their finances in order.