You may have heard that the 50 30 20 rule is the way to go if you’re struggling with budgeting, spending and/or saving. But what exactly is it, and how does it work?
The 50 30 20 rule (or the 50/30/20 rule) is a budgeting method that breaks down your finances into three categories — wants, needs and savings. It recommends allocating 50% of your income to your needs, 30% to your wants and 20% to your savings.
If applied correctly and consistently, this simple rule can put you on the path to financial freedom and help you make the most of your income — no matter how much you earn. In this article, we’ll show you how to use the 50 30 20 rule. We’ll also examine its effectiveness and answer some questions about this budgeting method.
How to use the 50 30 20 rule
One of the best things about the 50 30 20 rule is its simplicity — you can start using it today even if you’ve never created a budget. All you need to jump right in is a notepad or your notes app.
Here’s how to use the 50 30 20 rule:
- Examine your income. Write down your salary (or salaries) and note when it comes in. You can include allowances and other types of income if they come in regularly.
- Subtract your taxes from the overall pay. This step only applies to taxpayers, so don’t remove other automatic deductions (like your data subscription). These non-tax expenses will be part of your wants or needs.
- Save 20% of your income. For example, you should save ₦20,000 if your income is ₦100,000. We recommend using a savings app like PiggyVest since it allows automatic savings and offers annual interest rates of up to 10%.
- Allocate 50% of your income to your needs. Your needs include rent, electricity bills and food — items you can’t do without. You should consider debt repayments as a need when applying the 50 30 20 rule.
- Set aside 30% for your wants. Wants like entertainment, travel and luxury items are non-essential and discretionary expenses. You don’t need these items to survive, but they make life worth living.
It’s that easy!
Spending only half of your income on your needs might seem strange (and hard) at first, but it’s completely doable. You’ll need to cut down on frivolities and pursue cheaper options to make this possible.
For example, you could reduce your food expenses by cooking often instead of eating out. While this small trick might save you only ₦2,000 per month, you could reduce the overall cost of your needs if you apply it to more areas of your life.
What does it mean to pay yourself first?
Paying yourself first means prioritising savings when you receive income. It’s a personal finance strategy that’s a core part of the 50 30 20 rule and can help you build a healthy relationship with money.
To pay yourself first, follow the 50 30 20 rule we shared above and keep at least 20% of your income in a safe and secure platform like PiggyVest every time you make money. Of course, you can also use a regular savings account or just keep the cash in your kolo. Whatever works for you!
The main koko is to ensure you keep this money aside before doing anything with the cash.
The main benefit of applying this strategy is the discipline it brings. After all, consistently treating your money this way will help you subconsciously prioritise savings — a helpful trick if you’re building an emergency fund or saving towards a target.
Does the 50 30 20 rule work?
The 50 30 20 budgeting rule works — whether you’re a student navigating your allowance or a career person looking to elevate your finances.
How do we know? Well, besides the practicality of the concept, the rule was also popularised by Elizabeth Warren — the United States Senator and a renowned bankruptcy law expert. She is also the author of All Your Worth: The Ultimate Lifetime Money Plan.
Is the 50 30 20 rule realistic?
The 50 30 20 rule is realistic; anyone can apply it to their finances. You might only need to tweak your expenses to make it work. For example, you might have to reduce your spending on your needs and eliminate certain wants.
But we absolutely recommend keeping your savings at 20% and always paying yourself first.
Still, the 50/30/20 rule is only a simple framework. Therefore, consider it a starting point for budgeting and not a one-size-fits-all solution. As you get better at managing money, you can create and customise a new budget that aligns with your unique economic circumstances, financial goals and life (style) priorities.
What is the 40 30 20 10 rule?
The 40 30 20 10 rule is a variation of the 50 30 20 rule. Here, you spend 40% on your needs, 30% on wants, 20% on savings and 10% on debt repayment and other contributory activities (like ajo and charity donations).
You can apply this strategy like the 50 30 20 budgeting rule (by paying yourself first). It’s an excellent way to handle your finances if you’re paying off debts.
What is the 75 15 10 rule?
The 75 15 10 rule is a budgeting strategy where you set aside 75% of your income for needs, 15% for wants and 10% for savings. Compared to the 50 30 20 technique, you’ll save half as much money using this rule but have more cash to settle your essential needs.
This budgeting method might suit you if you prioritise your needs (such as when moving to a new house or starting a new job). To apply it, use the steps we’ve shared above.
Budgets are simple yet powerful tools for controlling your money, allowing you to directly measure the impact of every financial decision. But creating and managing a reasonable budget can be overwhelming, especially if you’re new to the affair. Fortunately, the 50 30 20 rule exists!
The tips and insights we shared in this article are practical, and we recommend trying out the 50 30 20 rule as soon as you make your first Naira.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.