Are you sick of living paycheck to paycheck? Are you wondering if the 50-30-20 Rule can really improve your finances?
By the end of this post, you’ll find out if this rule is going to help you. Plus you’ll also learn how to change it to suit your needs.
78 percent of Americans say they live paycheck to paycheck (2017 report by CareerBuilder).
You’re in this situation partly because the typical American annual income of $44,500 hasn’t increased for about 40 years when inflation-adjusted (The Guardian).
But don’t despair – there is hope!
Read on to find out more about the 50-30-20 rule, and how you can stop living paycheck to paycheck and improve your money situation.
What is Elizabeth Warren’s 50-30-20 rule?
50 – half your after-tax income is to be spent on necessities like housing and bills like car payments, auto insurance and home insurance (if you have bought your home).
30 – this percentage of after-tax income is to buy your wants, like shopping, eating out, hobbies, holidays or entertainment.
20 – this percentage of your after-tax income should be used to pay off debt or save for retirement.
The big question is . . . can the 50-30-20 rule work for you?
#1 The 50-30-20 rule can help your finances.
How can the 50-30-20 rule help you?
Knowing about these 3 categories makes you more aware of where your money is going. It makes you think about whether:
-you are spending the correct amounts in these 3 areas.
-you wish to adjust your spending patterns to change the percentage spending in the 3 areas.
#2 The 50-30-20 rule cannot help if you have a hard time separating needs from wants, even with something like housing.
If you live in a low-cost area on an above average income, 50 % toward housing and bills might be a lot.
On the other hand, if you’re not earning much, you need to spend more than half your income on necessities.
#3 The 50-30-20 rule can be a rough guide for your spending.
It can help you to understand and create your own budget.
But what if your necessities like housing and bills like car payments and auto insurance are higher, like 65 % ?
You just need to make a budget that works best for your situation. In this example, you may create your own 65-20-15 rule:
-65% on necessities
-20% to pay off debt and save for retirement
-15% on your wants – like eating out, hobbies and entertainment
It’s that simple. So create your own rule ASAP!
How to create your own money rule
#1 Write down your after tax income
#2 Add up all your monthly spending in the 3 areas and calculate their percentages.
After tax income: $40,000 a year
Necessities (like housing & insurance): $25,000 a year
Percentage of necessities as a proportion of total income =
($25,000 ÷ $40,000) X 100 = 62.5%
This means you have:
100% – 62.5% = 37.5% left for your debt repayment, retirement savings and wants like eating out.
-Your Necessities. What percentage of your after-tax income does this take up? ..……..%
-Your debt repayment and retirement saving. What percentage of after-tax income is this? ..……..%
-Your Wants e.g. shopping, eating out & hobbies. What percentage of your after-tax income is this? .……..%
(Note: If you can’t forgo a payment such as a minimum payment on a credit card, it can be considered a “need,” according to money experts Warren and Tyagi. Why? Because your credit score will be negatively impacted if you don’t pay the minimum).
Are you pleased with your current percentages?
You can change the way you are spending to make your finances better.
Important Tips to Strengthen Your Finances
#1 You must create your own rule if the 50-30-20 rule doesn’t suit your money situation.
Therefore your own rule could be the:
60-20-20 or 65-20-15 or 70-15-15 rule,
Just make sure your rule is doable and good for your finances.
#2 Use and test your own rule
Give yourself time to test your rule. Does it work? How well does it work?
Adjust it if you need to, so that it’ll work better for you.
#3 There are necessities that are clearly Not necessities.
Smoking and drinking are Not necessities.
If you smoke and drink, do yourself a huge favor and start cutting back on these now. For your own better health and a better financial future.
#4 How much exactly are you spending on wants?
You may be shocked when you add up how much you’re spending on eating out or computer games.
If you’re spending about $8 each week on snacks like chips, that’s $8 X 52 or $416 every year spent on food that’s not healthy and unnecessary. Why not cut back on paying for snacks?
Over time, you will come up with more ideas on how to save a bigger percentage of your income, by reducing spending on your wants.
I’ve found this out myself. My family used to eat out at a restaurant once a week. But today we eat out about once every 4 weeks. And we don’t feel like we’re depriving ourselves. We actually appreciate our restaurant visits more – the food tastes better.
What’s more, we’ve been saving good money, to the tune of about $1,600 every year, just by eating out less, and staying healthy by doing our own cooking ☺
#5 Always increase your savings and lower your spending on wants.
When you do that, you build up your finances and financial security. Then, you can reward yourself better as you’ll have more money to do so.
#6 Get to know more people.
Why am I talking about getting to know more people? Surely this is a not personal finance related!
But when you know more people, you tend to get more ideas and leads that can help your finances, by reducing your costs or giving you ways to make more money with the skills you have.
More than 50 percent of respondents say that they save less than $100 per month. But know that learning about where the better deals are can save you a lot of money. You may be recommended:
-Honest mechanics or plumbers that do a great job and charge very reasonably, that folks you know have used for years.
-New places to buy food or eat out that are great in value and taste.
-New places to get free food and other stuff that may not be found online. I myself have saved money in this way – I enjoyed my free apples and peaches recently ☺
Increasing your social contact will often make your healthier and happier – things that money cannot buy! Research has shown that “adults who are more socially connected are healthier and live longer than their more isolated peers”.
It’s likely that children also benefit similarly.
How to network more?
Do you regularly see some familiar people?
Instead of ignoring them, say hi. If they respond positively, you could make some small talk. Some folks can become your acquaintances and later, your friends.
Volunteer in any way you can. For example, if you love animals, give some of your time to care for them at a nearby animal shelter. You’ll meet people with something in common, who can become friends.
If the 50-30-20 rule works for you, use it. Motivate yourself to keep using the rule to help you stop living paycheck to paycheck.
Create your own rule if the 50-30-20 rule doesn’t work for you. What’s important is to understand where your paycheck is going each and every month, and make a rule that works well for you.
Always cut back on your wants, starting with wants that are the biggest drain on your finances.
Never confuse wants with needs. Alcohol and lottery tickets are not needs, and need to be cut back ASAP (get help if needed).
Increase your savings and give yourself rewards (within reason) along your way to freedom from living from paycheck to paycheck.
I know you can do it! Share this to help others.
Take concrete action now.