Easy Savings with the 50/30/20 Budget Rule

What does the 50/30/20 Budget Rule entail?

As a popular savings method, the 50/30/20 rule provides a clear structure for responsible financial management. The number combination - 50, 30, and 20 - represents three different categories in your household budget: essentials, leisure/wants, and savings.

50% for your essentials

The first step in applying the savings rule is to allocate 50% of your monthly net income for essentials. This includes necessary expenses such as rent, basic groceries, insurance, transportation costs, utilities, or internet - basically everything you truly need for daily living. Note: Your morning latte macchiato at the station unfortunately doesn't make the cut.

30% for "La dolce vita"

Of course, we all want to treat ourselves occasionally beyond our essentials - after all, life is meant to be lived. Therefore, you should reserve about 30% of your monthly net income for your leisure activities and luxuries. This includes restaurant outings, weekend getaways, vacations, and the new hobby you've always wanted to try - or simply the beloved latte macchiato to go.

20% for the piggy bank

Finally, you should save or invest the remaining 20% of your monthly income. You can invest this portion long-term in ETFs, set it aside as an emergency fund for unforeseen expenses, or invest it in your retirement savings. Tip: Set aside this portion immediately upon receiving your income - perhaps through a standing order to a separate account. Farewell temptation!

Tips for successful implementation

To effectively implement the budget rule, start by getting a clear overview of your income and expenses. Sounds complicated and strenuous? It's not! For this purpose, use the Liiva financial assistant. This tool summarizes your financial transactions in one place. Once you have an overview of your expenses, categorize them as "basic needs" or "wants" and calculate their share of your total income. You may find that certain areas of spending take up too large a portion of your income – perhaps you have high housing costs relative to your total net income. In this case, you could try to restore balance by saving in other areas. A small saving tip: Compare your current contracts for internet or health insurance from time to time. Often, with a bit of research, you can find cheaper contract models.

All that glitters is not gold

As much as the 50/30/20 budget rule shines with its simplicity and efficiency, it also has its downsides. Learn about them here:

1. Category Chaos:

   It's not always clear which expenses are truly "essentials" or perhaps more of "wants." Is the good cheese from the local farmer a necessary staple or rather a luxury I want to indulge in additionally?

2. Not One-Size-Fits-All:

   The rule doesn't account for individual circumstances. What works for one person's life situation may not fit another's. For example, if you work part-time, it's often not possible to save 20%. If you live in an expensive rental apartment because the housing market offers nothing else, your expenses for essentials may be higher. Consequently, the rule provides a good framework for guidance but should be adjusted individually based on life circumstances. Tip: Can't manage to save 20% right now? In the Liiva Financial Assistant, you can adjust your savings goals depending on your individual situation.

Conclusion

Overall, the 50/30/20 budget rule is an efficient rule of thumb that easily integrates into everyday life. It can help you strengthen your awareness of spending and consistently pursue your savings goals. With a little finesse and flexibility, it can be a good starting point for building wealth in the long run.