How to Stay On Top of Debt: Budgeting with the 50/30/20 Rule

Debt can set a course for the ruination of a person's life. While that statement may sound like an exaggeration, it often isn't. Unless addressed effectively, debts may spiral so far out of control that bankruptcy becomes unavoidable. The years leading up to the inevitable decision to file for bankruptcy can be painful and life-shattering. Rather than experience the devastating impact of out-of-control debt, instituting an effective plan to deal with financial obligations makes sense. Crafting a budget with the 50/30/20 rule could help with this cause.

/ The Basics of the 50/30/20 Rule /

Not too surprisingly, the 50/30/20 rule refers to an allocation of funds. The numbers reflect percentages. Specifically, they reflect percentages of how money from a weekly paycheck ends up being directed. How are the percentages allocated?

  • 50% for essential needs
  • 30% for wants
  • 20% for debts and savings

You won't have t decipher how this plan works. "Needs" refers to those things you cannot go without. You must live somewhere and owning or renting come with costs. A car or public transportation get you around. Medicine contributes to maintaining health. Everyone has to eat. Needs receive the biggest allocation because due to their unavoidable nature. You can't escape the necessities of life or their costs.

"Debts and savings" remain self-explanatory. Debt cannot be allowed to accrue and any obligations or bills that exist must be paid. Also, you must work against joining the ranks of those who have no savings to cover their retirement or even unexpected emergencies. Some money must go into savings.

"Wants" refers to discretionary spending on -- for lack of a better description -- things that aren't important but bring pleasure. Few people can go through life without spending some money on these types of things.

/ The Necessity of a Controlled Budget /

From a fiscal perspective, budgets make sense. Without a clear, structured budget in place, tracking where and how you spend your money becomes difficult. No budget means spending might not follow any logical manner. Absent a long-term budget, the potential to amass debt increases.

The 50/30/20 rule/plan does impose a structured budget plan to follow. The plan may raise certain questions, questions worth addressing.

/ Addressing 50% of the Needs /

Overspending on a lifestyle leads to debt. Look closely at some of your needs and determine if you really need them. If you are renting a $1,600 per month apartment when you could live in a $1,100 per month studio comfortably, you're overspending. In reality, that extra rent money doesn't belong on the needs list as much as it truly belongs in the wants category. Don't make this mistake or else a debt situation becomes unavoidable.

/ 30% vs. 20% /

Some may feel a bit of surprise that "wants" receive a 30% allocation instead of 20%. Truthfully, this can be credibly viewed as a controversial allocation. A certain logic is at work here though. By allocating money towards wants, the debtor does gain some happiness in life. People do need to invest a little bit in things that give them joy. Otherwise, life can take a turn for the miserable. When unhappy or stressed over debt, a person could lose his or her fiscal sense and go on a spending binge. Doing so may provide a temporary alleviation of stress. Unfortunately, the binge could lead to spending more than would be the case with a controlled allocation of weekly spending.

That said, those who would be happier with putting more money towards paying down debts and savings can do so. No law mandates that you must spend 30% each week on wants. However, capping the weekly amount of "frivolous" spending to 30% may stop you from going overboard.

And then there is a "trick way" to allocate your want spending. Money can be set aside for "wants purchases" at a later date. Perhaps half of the 30% could be put in a decent interesting paying money market account or certificate of deposit. When the time arises to spend money on personal wants, the money will be there. It also draws a return on investment. The interest on the funds could be moved to pay debts or cover budget expenses.

/ Putting a Good Budget in Place /

The 50/30/20 rule has no chance of working until actually put in place. Those worried about avoiding debt should review this plan and think about ways to effectively implement it.