For the last two weeks we addressed the 50/30/20 rule of budgeting. Over the next few weeks we will look at other “rules of thumb”.
📊 What Are Financial Rules of Thumb?
Rules of thumb can be a good approximate guideline for decisions, and there are tons of money rules that aim to get your finances on track. While everyone’s situation is different, these serve as a good starting point.
⚠️ Important Disclaimer
Since everyone’s situation is different, we’ll provide suggestions on when to rework these rules to your specific needs. Consider these guidelines rather than rigid rules.
The 50/30/20 Rule Recap
The 50-30-20 (that we previously discussed) suggests putting 50 percent of your income toward necessities, like housing and bills. Twenty percent should then go toward financial goals, like paying off debt or saving for retirement. Finally, thirty percent of your income can be allocated to wants, like dining or entertainment.
50/30/20 Rule
- 50% Needs
- 30% Wants
- 20% Savings/Debt
80/20 Rule
- 80% All Expenses
- 20% Savings/Debt
There are also variations to this rule, like the 80-20 rule, in which you use 20 percent of your income for financial goals, and then spend 80 percent on everything else.
Why the 50/30/20 Rule Works:
If you’re not sure where to start with a budget, breaking it up into these basic categories can be really helpful. Those percentages help create a balance between obligations, goals and splurges.
When the 50/30/20 Rule Doesn’t Work:
You might have trouble with this if you have a hard time separating needs from wants, even with something like housing. If you live in a low-cost area, 50 percent toward housing and bills might be a lot. On the other hand, if you’re not earning much, you might not have the luxury of only spending half your income on necessities.
Customizing Your Financial Approach
These rules of thumb are good starting points for your spending. But maybe you want to adjust them, or make a budget that’s more tailored to your situation. In that case, start from scratch, follow a few budgeting steps and design something that works best for you.
🔧 When to Adjust These Rules
- High cost of living areas: You might need 60% for needs and reduce wants to 20%
- Aggressive debt repayment: You might temporarily allocate 30-40% to debt
- Low income situations: Focus on needs first, then build savings gradually
- High earners: You might save 30% or more while maintaining lifestyle
🚗 Coming Next Week
Stay tuned for our next installment where we’ll explore smart strategies for saving towards a vehicle purchase. Learn how to determine how much car you can afford and create a realistic savings plan!
“A wealthy person is simply someone who has learned how to make money when they’re not working.” – Robert Kiyosaki
📚 Want to Learn More?
If you missed our previous posts on the 50/30/20 rule, check out Part 1: Calculating Your Income and Needs and Part 2: Wants, Savings & Debt Management.
