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Budget 101: debunking the 50-20-30 rule

Finance 101

A man in a red shirt working on his computer leaning against his gray couch

Budgeting. You know you should be doing it, but you probably aren’t. Why? Because it’s really difficult to estimate accurately what your expenses will be every month. Just taking a peek at your statements and seeing where your money is actually going can be scary. Hence the creation of the 50-20-30 rule. This is one of the most popular budgeting techniques, but does it work? We break it down for you below:

What is the 50-20-30 rule?

The 50-20-30 rule is a money management technique that divides your paycheck into three categories: 50% for the essentials, 20% for savings and 30% for everything else. 


50% for essentials: Rent and other housing costs, groceries, gas, etc. 
20% for savings: Savings accounts, retirement contributions, loans, credit card payments, etc.
30% for everything else: Nonessential expenses like clothing, restaurants, monthly streaming subscriptions, gyms, etc

If the 50-20-30 budget doesn’t fit your lifestyle, try one of these instead. While it might be easy to remember, the rule isn’t always easy to live by. The fact is when it comes to expenses one size doesn’t fit all. For example, people living in cities like New York or San Francisco, may need to spend almost their full paycheck on rent. If you freelance, or run your own business, your income might be too irregular for such a hard and fast rule. And what happens when you have high student loan debt or a low-paying job?

The envelope system

Visualizing your money can help you be more aware of how you spend it. That’s how the envelope system works. Take three to five envelopes and write what each one is for on the outside. The cash you put in these envelopes will need to cover both real-life purchases and online spending.

Let’s say you mark each of them “Groceries & Dining”, “Monthly Bills”, “Clothing & Misc. Shopping”. You are only allowed to spend what’s in the envelope for each of those categories every month.

Round up each purchase to the nearest dollar to help keep your envelopes from becoming messy change pockets. Instead, add that change to a separate savings account each month.

However, the simplicity of this method can also be its downside. Having large amounts of cash laying around at home or on the go may not be the safest way to keep your money. It’s also easy to cheat by taking money from one envelope and spending it in a different category.

The 80-20 plan

Where the 50-20-30 rule and the envelope system get complicated, the 80-20 plan gets simple. Instead of having to categorize every single expense into what is essential and what is not, you simply take 20% of your paycheck and deposit it directly into your savings account. The rest is yours to spend however you want.

The trick for this plan is to set up automatic withdrawals that take 20% of each paycheck as soon as it hits your bank account. Because that money is immediately placed into a separate savings account, it’s like you never had it to spend in the first place. Better yet, set up a direct deposit. This means your employer will deposit 20% of your paycheck directly into a separate savings account and the rest into your checking account.

Create your own

Budgeting needs are different for everyone. That’s why sometimes it’s better to create your own. Start by calculating your monthly expenses. Check your bank statements to make sure you’re jotting everything down. Mortgage or rent expenses are easy to remember, but we live in the age of subscriptions, and those streaming or gym expenses may filter through unnoticed.

Once you know how much you spend, determine your monthly income after taxes. This is easy when you have a regular salary but may be a little harder to determine if you have a freelance job or get extra funds via side gigs, rental income or interests.

Quick Budgeting Checklist:

1. Calculate your expenses
2. Determine your post-tax income
3. Set your payoff & savings goals
4. Keep track of your expenses

Finally, set the amount of money you want to direct to savings and to any payoff goals. Once you have all these numbers down, you can decide where your money will go each month and what disposable income you can make use of.

Now, it’s important to keep track of your expenses. Save all your cash payment receipts and compile them with your card statements at the end of the month. See if you’re overspending in certain areas or if you have a few extra dollars to save.

If creating or maintaining a budget is proving to be a tough task, it may be time to speak to a financial advisor. They can help you make the most of your money management by creating a plan or budget tailored to your unique needs.


Advisory services offered through John Hancock Personal Financial Services, LLC, an SEC Registered Investment Adviser. Boston, MA 02116.888-955-5432.