Saving money at the end of the month is not an easy thing to do. But we cannot say that it is impossible either. In fact, it is possible and there are several formulas that you could use. One of them, which is well known, is the 50-30-20 rule, with which you can control your expenses and establish a fairly acceptable balance between income and expenses.
But, to get to get the most out of this rule, You need to know it thoroughly to achieve your goal. Want to know more? Then take a look at this guide where I explain everything about the formula.
What is the 50-30-20 rule and why it works
To understand the 50-30-20 rule, the first thing you need to know is what it refers to and, above all, what the numbers in it mean. Well, the formula consists of dividing the income you have in a month into three different sections:
- 50% corresponds to 50% of your essential expenses or needs. That is, those basic needs that you have to pay no matter what, such as rent, mortgage, utility bills, food... I think you get the idea, but, in general, it corresponds to everything that is necessary to live and that you have to pay. In this case, within these expenses you would have the fixed ones (which are there every month), and the variable ones that may be necessary, but temporary, such as buying clothes.
- 20 corresponds to savings or debt payments. I know that right now you're thinking that saving isn't the same as paying off debts. And it's true, it isn't. But I'll explain it to you. This money that is saved in that section is what you would use to pay off debts that you have or that you have acquired; however, it is also so that, in case the money is not needed, you can save it as contingencies for what may happen in the future (something that breaks, for example, or that you have to buy by force).
- Finally, 30 refers to 30% of your income allocated to those optional expenses or desires you have. For example, to give you an idea, it refers to expenses such as going out to dinner with friends, going to the gym or buying yourself something that you can afford or want at that moment. The goal is for the money to be used for things that make you happy and that you can afford with that money. If the end of the month comes and you haven't spent it, you would pass off the 20% envelope as savings that you have made throughout the month.
How the 50-30-20 rule works
Now that you have a better idea of what the 50-30-20 rule is, the next step is to understand how you should apply it and make it work. To do this, it is best to have a list of your monthly expenses and the income you receive. Don't forget anything, no matter how small or cheap it may seem, because this will help you understand all the expenses you have and whether they are actually necessary or if you can ignore them.
If detect expenses that you can avoid, For example, subscriptions that you don't use, it's best to get rid of them. They are what are often called vampire expenses.
In the case of income, it will be easier for you because it is easier to locate and list.
Once you have this, you need to know how much income you have in total and divide it into three parts. 50% of your income is for essential expenses. 30% is for non-essential expenses or whims; and 20% is for saving or paying off debts.
Now, you have to keep in mind that:
- You must cover your expenses with 50% of your income. If you have more, if it is not too much, it would not be a problem; but if you do not cover it and have to use the 20%, it means that your economy is not very good and you should reconsider correcting it.
- With 30% you will be taking care of what can make you feel happy. But if your expenses are too high, you will be in trouble again. So you have to make sure that this does not happen. If you do not have these whims, you can put this money into your savings envelope. Or, if your expenses are higher, put it there.
You must understand that this 50-30-20 rule is not a fixed rule. It is true that it is called that. But that does not mean that the numbers cannot be varied. That is, the rule can be 60-20-20, or 80-10-10. It is true that the most well-known is the original one; however, depending on the business or economy and lifestyle, it could be considered to be flexible. For example, for a two-person economy, the rule could be that one. But there is also the option of establishing more parts to divide the income.
Now that you know the 50-30-20 rule, how about putting it into practice and seeing if it's what you need to save money?