The 50-20-30 Rule
If you’re new to budgeting, figuring out how to manage your money each month can feel overwhelming. Not only do you need to organize, but you also have to make difficult decisions about how to spend your cash. Relying on the experiences of others can help only so much because your income and expenses are unique. Someone may be able to spend NGN 50,000 per month on clothing, but that kind of spending may not work for you.
However, there’s good news: You don’t need complicated spreadsheets with countless spending categories, and you don’t need to be a financial expert to understand how much money you can spend. You simply need to follow the 50-20-30 Rule.
What is the 50-20-30 Rule?
The 50-20-30 Rule helps you build a budget by using three spending categories:
- 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like food and transportation for work//school.
- 20% of your income should go to financial goals, meaning your savings, investments,
- 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on movies and travel).
Keep in mind that the percentages for essentials and flexible spending are the maximum you should spend. Falling under those guidelines can leave more money for other financial goals.
How to start a 50-20-30 budget
Figure out what’s currently happening with your finances. First, look at your pay stubs to determine exactly how much money you bring home each month. That’s your income and what you’ll base your 50-20-30 split on.
Next, track your spending. Yes, that means keeping up with every Naira, from the big stuff such as rent to the Shawarma you usually get grab after class. Then divide your spending into one of the three categories: essentials, financial goals, and flexible spending. From here, adjust your spending to ensure you’re falling into the 50-20-30 parameters. If you’re overspending on stuff you want but don’t need, it’s time to cut back to save more.
Why the 50-20-30 Rule works
It keeps your personal finances simple so you can pay for important things, add to your savings, and have the freedom to use some money just for fun. It’s also a good starting point for the budgeting novice. There’s no uncertainty, your action steps are clear, and it even provides for savings, investments, and other financial goals. This makes it much more likely that you’ll stay the course over time, ultimately reaching your desired financial stability.
The 50-20-30 Rule also offers some flexibility. You can bend it a bit by altering the percentages to make it work better for you. It’s not about the exact percentage breakdown because all budgets will be slightly different.The key is to take action and use a system to help you stay consistent in managing your money every month, and making sure you’re covering your expenses, being responsible by saving for tomorrow, and giving yourself some room to enjoy life today.