Even though you’re happy with your salary, there’s still no money left over at the end of the month. The 50/30/20 rule can now be a helpful budgeting method to optimize and save on your expenses
The 50/30/20 Rule: What’s Behind It and Who Came Up With It
The 50/30/20 rule is a fairly simple way to manage your budget sensibly and responsibly. The basic idea of the concept can already be guessed from its name and aims to divide your net income month after month into the following 3 expense headings:
- Basic needs: 50 percent
- Requests: 30 percent
- Save: 20 percent
The big advantage of this method is that you only have to focus on 3 categories when creating a budget plan. Savings apps and other solutions are usually much more complex and often cause users to lose motivation after a short time.
The sustainable management of your money with the 50/30/20 rule, on the other hand, follows a clear, understandable and simple system. Incidentally, it was developed by former US Senator and Harvard professor Elizabeth Warren and Amelia Warren Tyagi, her daughter. In their joint book, All Your Worth: The Ultimate Lifetime Money Plan, published in 2005, the budgeting method first appears.
50 percent of your salary for basic necessities
According to the 50/30/20 rule, the largest category of your expenses includes those items that cannot be avoided. Included are all things that are necessary for your life and have to be paid for. These unavoidable expenses should cover about 50 percent of your monthly net income. Your basic needs include these items:
- Rent payment
- Loan repayments
- Electricity (and gas, if applicable)
- Mobility (car or public transport)
- Insurance (especially for health and motor vehicles)
- Food
A simple calculation: If your monthly net income is 2400 euros, for example, you should ideally plan 1200 euros for all necessary expenses. If you notice that you are currently spending more than the recommended 50 percent on your basic needs, then you should change something – if possible.
For example, you could use comparison portals when it comes to insurance and electricity/gas providers, which can help you find cheaper rates as well as significant savings through bonuses. Buying cheaper staples, moving to an apartment with a lower rent, and a successful salary negotiation can also help.
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A maximum of 30 percent of your salary for your wishes
Everyone has desires and many of them can be fulfilled with money. If you stick to the 50/30/20 rule, you will have a maximum of 30 percent of your net income available per month for this expense heading. You may discover that you are currently spending too much to meet your personal needs.
Then you should ask yourself whether individual posts are really necessary for your life. If the answer is no, it’s best to take on every single one of your desired expenses and check what you are most likely to be able to do without. Examples of personal but non-essential needs include, but are not limited to:
- Subscriptions (pay-TV, streaming services, newspapers, Xbox Gamepass)
- Memberships (clubs, gym)
- Holidays and excursions
- Events (concerts, stadium visits)
- Shopping
- Restaurant visits
- Foods beyond staple foods
With a net income of 2400 euros, you could invest 720 euros per month for your personal wishes according to the 50/30/20 rule. As you can see, even though the budgeting method encourages you to handle your money responsibly, enjoyment is still possible.
20 percent of your salary every month to save money
If you manage to spend a maximum of 80 percent of your monthly net income on basic needs and desires in accordance with the 50/30/20 rule, you will have 20 percent to save. For example, these payments fall into this category:
- Savings plans (ETFs, etc.)
- Call money account
- Passbook
- Building loan contract
- Special repayments on loans
The special repayments for loans mentioned above go beyond the minimum repayments and ensure that you reduce your liabilities faster in the future and have more available for actual savings or for your personal needs. The interest savings alone can be worth it.
With regard to our example calculation with a monthly net income of 2400 euros, 20 percent amounts to 480 euros. With this sum, you can build up an additional income in old age in addition to the statutory pension without having to forego the fulfillment of many wishes in the present – thanks to the 50/30/20 rule.
Easy application of the 50/30/20 rule in everyday life
Just as easily as the 50/30/20 rule works, it can also be integrated into your everyday life. In other words, it’s easy to implement and your effort is low. All you need to do is follow 3 steps:
- Calculating your monthly income
- Divide your expenses into the 3 categories
- Be realistic about your spending
In order to apply the 50/30/20 rule, you first need to know what your net income is in the first place. Employees with a fixed salary will find this information on their monthly statement, while the self-employed have to reckon with fluctuating income. If you’re a freelancer, you’ll deduct your business items and the taxes you have to set aside.
Then you take your bank statements and see what you’re spending your money on. Above all, you can see all the regular expenses that are debited month after month. In addition to basic needs such as rent and electricity, these can also be wishes such as membership fees. Now all you have to do is adjust your spending to the 50/30/20 rule by thinking about what you can do without.
Tables and calculators for the 50/30/20 rule
You may be thinking that it would take a long time to add everything up separately due to your numerous expenses. If you can’t or don’t want to take the time, you can now find various facilitations. There are many calculators and tables that you can use to implement the 50/30/20 rule. With special Excel spreadsheets, you can make the whole thing even more precise and create your budget quickly and easily.