Do you know the 50/30/20 rule for managing your monthly budget?

The 50/30/20 rule is quite simple to understand and apply, as you will see below.

50%: Needs

According to the 50/30/20 rule, you should allocate half of your income to paying for what you really need to live. So what counts as a need? Its meaning is as basic as possible, as it represents everything without which one cannot survive with dignity: housing, food, transport and basic services, such as water and electricity. However, we know that it is not always easy to identify the «essential». Let’s see how to classify some expenses.

Examples that may create doubts:

Debt repayment

Almost all of our debts must be paid off monthly. Therefore, these monthly payments qualify as necessities. But what about the additional repayments we could voluntarily make each month? Since they are not required to update your obligations, you can include them in the 20% we will describe below.

Optional services

We usually treat all contracted services as necessities, which is not always true and largely depends on the cases. For example, if you work from home, even part-time, broadband is probably a necessity. However, if you only use the Internet for leisure, WiFi can be classified as a need. Therefore, carefully evaluate everything that you usually consider a necessity and make sure to adapt the categories to your lifestyle.

Over budget?

If you have already discovered that some of your needs might actually fall into the other two categories, you should think about optimizing your budget. Is it possible to move to a smaller house? Do you hire a slower but low-cost Internet connection? Buy a cheaper vehicle? You probably have more wiggle room than you thought.

Under budget?

Excellent! Before you start thinking about using this portion of your budget for other expenses, consider increasing the amount by 20% to improve the health of your finances through saving and repaying your debts.

20%: savings and debt repayment

It may appear last in the 50/30/20 rule, but it is the second most important aspect of this financial plan.

If you have particularly high debt or feel you are not meeting your savings and retirement goals, try reducing your individual needs and/or cutting your needs budget. However, don’t fall into excessive rigidity and create a budget that you can maintain in the long term.

Voluntarily paying off your debts and creating an emergency fund (the ideal is to have three times your monthly income as a fund), as well as reaching your savings goals and investing in your pension are the best guarantees for a peaceful future.

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