One part of a decent financial plan is a regular budget for your monthly income and spending. Most of us need some simple rules of thumb to get into good habits and start growing our wealth. That’s where the 50/20/30 rule comes in. Originally set out in a book by Harvard scholar and US Senator Elizabeth Warren, it’s been promoted quite a bit lately as a way for millennials to get a grip on their money.
3 buckets for your money
The 50/20/30 rule sorts your money into three buckets: essentials, financials, and flexible spending. Essentials is max 50%. It covers stuff like mortgage, rent, food and utility bills. Financial priorities should bag at least 20%. That includes retirement saving, investments and paying down expensive debt if you have any. And flexible spending is allocated at most 30%, covering things that vary each month. It’s the spending you can pull back on if you need to.
Is it any good?
The 50/20/30 rule has got traction because it’s simple and realistic. For example, 30% for flexible spending is a decent chunk – maybe too much for some – but its generosity means you’re more likely to sustain your plan. It also helps you picture a reasonable amount to save and invest each month.
But the rule’s strengths are also its weaknesses. Its simplicity means it doesn’t work for everyone’s finances, in particular at higher income levels. The rule is also too vague for some people to be effective as a budget.
Some alternatives
This hinges on how much detail you’re prepared to get into. Some people suggest a ‘zero-based’ approach, building up all costs from zero. If that sounds extreme there are plenty of simple online trackers which can help devise a regular plan. But if you’ve no budget in place right now, the simplicity of to 50/20/30 rule might just get you started.
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