We've all been there: there was money in the account just a moment ago – and now you're running out of cash again until your next paycheck. Luckily, there's a very simple principle that can help you finally save some money: the 50-30-20 rule. This formula not only gives you a better overview of all your finances, but also helps you to build up wealth in the long term.
The 50-30-20 rule is a theoretical guideline that helps you allocate your income in an optimal way. This simple principle can give you helpful insight into your spending, but also helps you understand how much you should personally be saving or investing. It's a game changer for those who need concrete guidelines to manage their finances!
This simple rule divides your net income into three categories:
- 50% for your basic expenses/fixed costs
- 30% for your personal needs
- 20% – for savings, debt repayment or asset accumulation
Each of these categories has a specific benefit. The largest part refers to your current fixed costs, which make up half of your monthly income. You can spend a further 30% of your income on personal needs. The remaining 20% is the amount that you can save each month and use to build up assets. As it's an easy split to remember, the 50-30-20 rule is an ideal budgeting tool for those looking to manage their finances well into the future!
Why budgeting is so important
The term budgeting comes from the business planning process. The aim of budgeting is to map out a company's planned vision using figures. This can also be applied to your personal finances. If you plan to save a nice sum of money every month, you should successfully set up your budgeting using the following 50-30-20 rule. But how exactly does the 50-30-20 rule work?
50% of your income goes towards your basic expenses/fixed costs.
The first number in the 50-30-20 plan, namely 50, refers to your basic expenses. These are fixed costs that you have to pay every month: your monthly rent, all insurance contributions, food for your daily needs and everything that your car (including petrol) or your public transport (bus and train tickets) generally costs you. If we assume a net income of €2,300 per month, €1,150 would be a reasonable allocation for your basic costs, according to the 50-30-20 rule.
30% for your spending money, personal needs and desires
The 30% of the 50-30-20 plan refers to all expenses that you can use to make your life more enjoyable and to meet all your personal needs and desires, e.g. hobbies, activities, travel, consumer electronics, etc. These are expenses that you do not necessarily need in order to survive and are available for spontaneous decisions. Based on the previous example of a net income of €2,300 per month, a sum of €690 can be allocated towards this category.
20% savings to pay off debt or build wealth
If you've successfully adhered to the 50-30-20 plan for your fixed costs and personal costs, you still have 20% of your income left. You can use this portion to either pay off debt or to save or invest in order to build up a healthy nest egg or rainy day fund.
Based on the previous example of a net income of €2,300 per month, you would allocate around €460 towards this category.
Example calculation using the 50-30-20 rule
Summarising our example in which we assume an average net income of €2,300 per month:
- 50% fixed costs: €1,150
- 30% personal expenses: €690
- 20% savings: €460
- Annual savings: €5,520
As you can see, by the end of the year you can save a tidy sum of €5,520 if you stick closely to the 50-30-20 rule. Even if you have to deal with unforeseen expenses such as repairs or similar, you will still have enough savings that you can access as you wish. Ideally, you would invest some or all assetsaccumulated through the 50-30-20 plan to take advantage of the compound interest effect. As you know, Peaks is a simple and hassle-free way to automate this so you can live your life with the reassuring knowledge that you are sticking to the 50-30-20 rule without needing to spend any extra time and attention to the matter.
Ready for your monthly budgeting plan based on the 50-30-20 rule?
Creating a monthly budgeting plan using the 50-30-20 rule is simple. Follow the five steps below:
- Subtract 50% from your net income to determine what you should ideally be spending on fixed costs.
- Subtract 30% from your net income to determine what should ideally be your spending amount.
- Subtract 20% from your net income to determine what you should be setting aside for the future.
- Note down each of these monthly budgets so you have clear numerical guidelines to stick to.
- Personalise the free budgeting sheet template linked below to create a monthly tracker for your incoming and outgoing money per month. This will help you understand how well your expenses currently fit the 50-30-20 rule, and if not, identify which areas can be focused on to reduce your spending in order for the ideal balance to be achieved.
Free template for your budgeting plan
As mentioned, to finally tackle your finances this year, we recommend downloading our free budgeting sheet in the form of an Excel or Google spreadsheet. If you live in the Netherlands, this is already pre-filled with costs that come hand in hand with navigating Dutch bureaucracy. Add your own fixed and personal costs to give yourself a comprehensive overview over your spending.
Be aware that investing involves risks and that you may lose some of your investments.
Nele
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