The 50- 30-20% Rule

The 50- 30- 20% rule is a financial guide on how to expend income.

You should not let your circumstance at the end of the month determine how you expend your income.

For some people, if there is a lot of spending, then they save little to nothing at the end of the month.

And if the situation at the end of the month does not require much spending, only then is saving possible.

However, financial prudence requires a more effective strategy, particularly because the former, and not the latter, is usually the case with most people.

How then should you expend your income at the end of the month?

This is where the 50- 30- 20% rule comes in handy.

US Senator, Elizabeth Warren made this rule popular.

The 50- 30- 20% rule is a budgeting principle that summarizes how to spend after- tax income.

According to it, 50% is for needs, 30% is for wants and 20% is for savings.

Needs

This includes necessary expenditure such as feeding, rent, bills and other requirements for upkeep. Needs constitute major expenditure because they are frequent, many and urgent.

Wants

Unlike needs, wants are optional and not urgent. They may include shopping, eating out, going to the movies or getting the latest gadget in town.

Savings

Even though this has the smallest percentage, it should be set aside first to avoid spending into it. This allocation may also go to mutual funds and other kinds of investment.

It is important to note that the rule is sometimes comes in the order: 50- 20- 30.

The lease percentage is for wants in this case.

This, of course, depends on the individual in question as the rule is not cast in stone.

Some people even save up to 50% of their income and allocate the other half to needs and wants.

At the end of the day, the rule is a guide, but it will be helpful if the percentage of income allocated to savings is 20% or more.

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