What is the 50/30/20 rule in finance?
The 50/30/20 Rule Explained
The 50/30/20 rule is a simple and popular budgeting guideline that helps individuals manage their finances effectively. It divides your after-tax income into three broad categories:
- 50% – Needs: Allocate half of your income to essential expenses that you must pay. These include rent or mortgage, utilities, groceries, insurance, transportation, and minimum loan payments.
- 30% – Wants: Set aside 30% for discretionary spending, which covers non-essential expenses such as dining out, entertainment, vacations, shopping, and hobbies.
- 20% – Savings and Debt Repayment: The remaining 20% should go towards personal savings, investments, and extra payments toward any debts (beyond the minimum payments).
This rule provides a straightforward framework for balancing spending and saving, making it easier to budget for both present needs and future goals.