The 50/30/20 Rule: A Simple Approach to Budgeting and Saving More
Budgeting often gets a bad reputation. We know it’s important, but the process can feel complicated, time-consuming, and like it’s cutting out all the fun. Sound familiar?
If you’ve ever tried to create a budget and felt bogged down by too many categories and calculations, you’re definitely not alone. That’s where the 50/30/20 rule comes in. It’s like the minimalism of budgeting—simple, clear, and easy to implement.
Ready to take control of your finances in a way that feels empowering and flexible? Let’s go!
What is the 50/30/20 Rule?
The 50/30/20 rule is often touted as one of the simplest ways to budget. The idea is to divide your after-tax income into three basic categories:
Needs (50%)
This category covers essential expenses like housing, utilities, groceries, and transportation. Essentially, these are the things you wouldn't want to live without.
The idea is to ensure that you're meeting your basic needs comfortably while keeping these essential expenses within half of your budget. By doing so, you create a solid foundation for your financial health.
Wants (30%)
Ah, the fun part! The “wants” category includes things that enhance your lifestyle but aren’t strictly necessary. This can be anything from dining out, subscriptions, and hobbies to that cute pair of shoes you've been eyeing.
Allocating 30% of your income to things you enjoy helps you live life richly instead of feeling like you're living on breadcrumbs. Just remember, the key here is moderation!
Savings (20%)
Last but certainly not least is the savings category. This includes not just your emergency fund, but also contributions to retirement accounts, investments, or saving for big purchases like a house or a vacation.
By setting aside 20% of your income, you create a safety net for yourself and can enjoy peace of mind knowing you’re planning for the future.
That’s why I like to think of the 50/30/20 rule as a starting point. It gives you structure, but you need to be prepared to adjust those percentages based on your unique situation—and that’s okay. In fact, let’s talk about how to do just that.
Adapting the 50/30/20 Rule
No budgeting rule can account for everything that’s going on in your life. Maybe you have student loans eating away at your paycheck, childcare costs, or you're in a high-cost-of-living area. Or, on the flip side, maybe you want to be more aggressive with your savings to hit some big life goals faster.
Here’s how you can make the 50/30/20 rule work, regardless of your situation:
1. Personalize Your “Needs” vs. “Wants”
One of the biggest areas where people get tripped up is trying to distinguish between “needs” and “wants.” The truth is, there’s no universal rule for what falls into these categories. A gym membership, for example, might be a “want” for some but an essential part of mental and physical well-being for others.
To get more clarity, ask yourself: “Could I live without this expense if I had to?” If the answer is yes, then it’s probably a want. If not, it’s a need.
That said, if your needs are currently taking up more than 50%, don’t stress. The goal is balance, not perfection. If you’re in a high-cost area or have significant debt, you might need to adjust the percentages—just be mindful of keeping savings a priority, even if it’s less than 20%.
2. Flex the Rule Based on Your Goals
Are you saving for a down payment on a house? Trying to eliminate credit card debt? Or maybe you’re planning a sabbatical from work and need a larger cash cushion. If you have a big goal, you might want to shift the 30% for “wants” toward your savings or debt repayment.
For example, in a particularly aggressive saving phase, I shifted to a 50/20/30 rule—50% for needs, 20% for wants, and 30% for savings and debt repayment. Once I hit my savings goal, I loosened the reins a bit and reintroduced more “wants” spending.
While the 50/30/20 rule may not fit everyone perfectly, it offers a flexible framework that can be adjusted to meet personal financial situations and goals.
Strategies to Grow Your Income Beyond Your Paycheck
While mastering the 50/30/20 rule is important, there’s an equally powerful lever you can pull to transform your finances: increasing your income. A lot of budgeting advice stops at “cut back on spending,” but that can only take you so far. If you really want to supercharge your savings or tackle debt faster, bringing in extra income can make all the difference.
Here are some unique and overlooked ways to increase your income without burning out.
1. Leverage Your Existing Job for More Income
Before diving into side hustles, let’s talk about how you can make more money right where you are—at your current job. This approach is often overlooked because many of us think raises or promotions are out of our control, but they’re not! Here’s how to boost your earning potential at your current gig:
- Negotiate a Raise: Do your research and prepare a case for why you deserve a raise. Sites like Glassdoor and Payscale can help you figure out what others in your position are earning. Don’t be afraid to ask for what you’re worth.
- Take on Freelance or Consulting Work at Your Day Job: If your job allows it, ask about taking on additional projects as a contractor or freelancer. Many companies are open to paying for extra work outside of your regular hours, especially if they know and trust you.
- Ask for Performance-Based Bonuses: If a raise isn’t in the cards right now, see if you can negotiate a performance-based bonus. This could be tied to hitting certain targets or taking on a specific project.
2. Rethink the Side Hustle—Passive Income Is Your Friend
We’ve all heard about side hustles, but here’s the deal: not every side hustle requires trading more time for money. There are passive income streams that can bring in extra cash with little ongoing effort. Here are a few ideas:
- Sell Digital Products: Are you good at graphic design, writing, or creating planners or templates? Selling digital products on sites like Etsy or Gumroad allows you to create something once and sell it repeatedly without constantly trading time for money.
- Rent Out Your Stuff: Have extra space in your home? Rent it out on Airbnb. Got a camera, drone, or other high-ticket items you don’t use all the time? Consider renting them out on platforms.
- Dividend Stock Investing: If you have a bit of extra cash saved, look into dividend-paying stocks or dividend-focused ETFs. This is a way to earn money regularly without actively doing anything beyond your initial investment.
3. Get Creative with Unconventional Income Streams
Sometimes, the best way to boost your income is by thinking outside the box. Here are some less common ways to bring in extra money that you might not have thought of:
- Sell Your Expertise as a Course or Workshop: If you’re an expert in a particular field or hobby—whether it’s marketing, knitting, or yoga—you can monetize your knowledge. Create a digital course or offer paid workshops to share your skills. Sites like Teachable or Udemy make it easy to launch.
- Participate in Market Research Studies: Many companies pay individuals to participate in research studies or product testing. Websites like UserTesting, Respondent, or Pinecone Research can connect you with paid opportunities to share your thoughts and experiences.
- Monetize a Hobby with a Low Barrier to Entry: If you love dogs, sign up to walk dogs or pet sit. If you’re handy with tools, TaskRabbit lets you pick up odd jobs around your area.
Investing for Growth Without the Overwhelm
While saving is critical, investing is where you can truly grow your wealth. If you’re new to investing or feel overwhelmed by the idea, you’re not alone. Here’s a simple, approachable way to start:
1. Micro-Investing: Start Small
Micro-investing apps like Acorns or Robinhood allow you to invest small amounts—even just your spare change from everyday purchases. Over time, these small contributions can add up significantly, especially when compounded over years. The key is to start early and be consistent.
2. Low-Risk Options: Bonds and High-Interest Savings Accounts
If the stock market feels too risky right now, consider lower-risk options like bonds or high-interest savings accounts. Bonds offer predictable returns and less volatility than stocks, and many high-interest savings accounts offer better interest rates than traditional savings accounts.
3. Robo-Advisors: Investing Without the Guesswork
For those who want to invest but aren’t comfortable choosing individual stocks or bonds, robo-advisors like Betterment or Wealthfront are fantastic options. They take into account your financial goals, risk tolerance, and timeline and automatically create a diversified portfolio for you. All you have to do is set it up and let the algorithm do the rest.
Extra Tips on Budgeting and Saving
1. Use the Envelope System for Discretionary Spending
While many people use digital tools for budgeting, the physical envelope method can be incredibly effective for managing discretionary spending (the "wants" category).
Withdraw cash at the beginning of each month and divide it into envelopes for categories like dining out, entertainment, or clothes. Once the cash is gone, it’s gone—helping you to stick to your limits more easily.
2. Automate 'Round-Up' Savings on Every Purchase
Many banks and apps now offer a round-up feature, which rounds up your purchases to the nearest dollar and automatically transfers the difference to your savings or investment account.
For example, if you buy coffee for $3.50, the app rounds it up to $4 and deposits the extra $0.50 into your savings. It’s a small but powerful habit that adds up over time.
3. Adjust Your Budget for 'Unexpected' Annual Expenses
While many people budget month-to-month, they often forget about annual or semi-annual expenses like car registration, holiday spending, or insurance premiums.
Instead of scrambling to cover these costs when they arrive, build them into your monthly budget by dividing the total by 12 (or 6, depending on the timeframe) and saving that amount each month. This proactive budgeting eliminates the stress of surprise expenses.
4. Create a ‘No-Spend Day’ Calendar
Pick one day each week when you commit to spending absolutely no money. It’s not just about reducing expenses on that day but creating a mindset shift that encourages you to find joy in activities that don’t involve spending.
Over time, this habit cultivates a more frugal lifestyle as you begin to recognize areas where spending isn’t necessary at all.
Mastering Your Money with Flexibility
The beauty of the 50/30/20 rule is its simplicity, but its true power comes from customizing it to fit your life. It’s not about rigidly sticking to a formula; it’s about creating a budget that works for you, in whatever season of life you’re in.
And remember, the key to long-term financial success isn’t just cutting back on lattes—it’s finding ways to grow your income, invest wisely, and enjoy the ride along the way.
So, whether you’re starting out or refining your budgeting game, remember: your money should work for you, not the other way around. With the right strategies in place, you can manage your budget, boost your income, and still have room for the things that make life fun.
