The 50-30-20 Rule
If you are a recent graduate trying to figure out, “how am I going to manage to support myself?” Or if you are in full adult mode, debts are a constant in your life and your wealth simply doesn't grow….you need to know the 50-30-20 rule. These percentages are suggested by financial experts to cover your salary, needs, pleasures and also create savings. The rule gives you an idea of how close or far you are from being financially healthy, from which you can make the necessary adjustments to better manage your money.
Understand the Rule
The 50-30-20 rule understands that there are tangible and immediate objects and services necessary to cover and satisfy the “here and now”, but there are also some to ensure future stability.
Most people are aware of two types of obvious expenses each month.
Those where the money is used to pay basic services, food, and transportation. Careful! Pleasures should not be confused with needs: buying water is necessary, but buying the imported brand from Europe is a pleasure.
To these expenses, the rule says grant them 50% of your net salary.
Those where the money is used to maintain a certain lifestyle, whether it’s through a telephone plan, going out on weekends, buying a certain brand of food, clothing from a particular store, etc.
To these expenses, it’s allowed to grant them 30%.
Not everyone knows about the third expense, which is rather betting on yourself: savings. In savings there is no tangible object or service that is exchanged at the moment, but it is important to consider it month by month to cover a future goal, such as a retirement fund, the payment of a university scholarship or a vacation.
As a rule, 20% of your net salary must be allocated to savings.
Identify your expenses and apply the rule.
Think about your current situation and write down your necessary expenses, expenses for pleasure and how much to allocate to savings. If this is the first time you’ve heard about this rule, you probably don’t follow that 50-30-20 rule. This usually happens because it depends a lot on the economic commitments of each person. The important thing is:
- Realize how much your real purchasing power is, so as not to get into debt with what you cannot pay.
- Consider savings as a real percentage within your economic situation, not as “what is left over at the end of the month”. Even if you can only save 5%, you’ll be instilling the healthy financial habit of looking into the future.