When it comes to personal finance, the 50/30/20 rule is a long-standing rule of thumb to help people budget their income and allocate enough money to help cover immediate expenses, investing, savings and debt repayment, and discretionary expenses. The rule states that you should cap fixed expenses such as rent and utilities at 50% of your monthly income. The next category, savings and debt repayment, should make up 30 percent of your income. Finally, you can spend the remaining 20 percent as you’d like.
It is important to remember that these percentages are the maximum that you should spend on these categories. If you spend less than 50 percent of your income on fixed expenses and want to allocate more money to your savings, more power to you.
While the 50/30/20 rule may look great on paper, it can be challenging to implement in practice. When individuals look at the rising cost of living due to inflation and rising housing costs, it can lead some to wonder whether the 50/30/20 rule still holds up in 2022.
Does the 50/30/20 Rule Apply in 2022?
The short answer is yes, it will always be a good idea to limit your monthly expenses to 50 percent of your income to allow you to save and live comfortably, even in 2022.
The longer and more complicated answer is that it may be harder to limit your monthly expenses to just 50 percent of your income. This is because consumers across the United States have seen the price of rent/housing, gas, and groceries increase significantly over the past several months. Those households who may have been living on the cusp are likely spending more than 50 percent of their income on these expenses.
In addition to fixed monthly expenses, the rule does not take households that carry a lot of debt into account. In these cases, 30 percent may not be enough to pay off debt and save. A workaround for this would be to include debt payments in the fixed monthly expense category to allow for extra payments that not only pay off the interest but the principle as well.
Takeaways
If there are two things that you should take away it’s that first, while the cost of living is rising, the 50/30/20 rule can help you manage your monthly expenses. The second takeaway is that the 50/30/20 breakdown should be more of a hard-fast rule and more of a recommendation. Every household and every individual’s financial situation will be different. What works for one person may not work for you. That being said, it’s a great starting point and it can help you find a place to start when creating your monthly budget.
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