Personal Finance / Unit 2: Budgeting
2.3 The 50/30/20 Rule
Notes
A simple guide: split net income into 50% needs, 30% wants and 20% savings and debt repayment.
- It is a starting point, not a law. In expensive areas needs may take more than 50%.
- Savings include emergency funds, retirement and extra debt payments.
- Example: net income $2,000. Needs $0.50 \times 2000 = 1000$. Wants $0.30 \times 2000 = 600$. Savings $0.20 \times 2000 = 400$.
- Check: $1,000 + $600 + $400 = $2,000.
Practice
Under the 50/30/20 rule, which category gets 20% of net income?
Needs 50%, wants 30%, savings and debt repayment 20%.
Net income is $3,000 per month. How much does the 50/30/20 rule suggest for wants?
$0.30 \times 3000 = 900$.
Nia's net income is $1,800 and her needs cost $1,080. Compared with the 50/30/20 guideline, her needs are:
$\displaystyle \frac{1080}{1800} = 0.60 = 60\%$, which is higher than 50%.
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