50-30-20 Rule; Not A Rule Of Thumb!

It’s hard to think about planning your life financially without budgeting. 

Budgeting is setting your finances and allocating specific percentages to your needs, wants, and savings. Ideally, everyone wants to have enough money to not cut back on their wants and savings or maybe have enough money to hire people to do this. The dream. 

When we don’t feel flexible enough to get a financial planner, we do our own research on social media, search engines, friends, family, or even colleagues on how we can best plan our money.

This usually, more than often results in us getting a bit generic budgeting advice. Or get advice on what works for these other individuals. One thing that stands out though is the budgeting yardstick, the 50-30-20 rule. 

This rule dictates that we use 50% of our total income for needs (bills, food etc), 30% on wants (miscellaneous spending), and 20% on savings (fixed savings, emergency fund). This allows us to allocate our finances to designated use without panicking about leaving certain things out.

We shall examine a few case studies using this rule.

All the following individuals earn KES 50,000 and use KES4,000 to work every month. 

#1 

Monica recently graduated, lives with her parents, no financial obligations apart from transport and a KES 5,000 phone bill. She saves KES 15,000 every month. 

5,000 + 4,000 + 15,000 = 24,000 (She has 26,000 to spend on her wants)

Model is18-52-30 

#2 

Lenon lives in a KES 7,000 house and uses KES 13,000 for essentials. He also saves KES 15,000 every month. 

7,000 + 13,000 + 15,000 + 4000 = 39,000 (11,000 on wants)

Model is 48-22-30 

#3 

Tyrese lives in a KES 6,500 house with his small sister, he pays KES 13,000 for her school and uses KES 14,000 for essentials. He saves KES 7,000 per month. 

6,500 + 13,000 + 4000 + 14,000 + 7,000 = 44,500 (5,500 on wants)

Model is 75-11-14  

Tyrese clearly spends a lot more on essentials than the rest and the model itself. It is always an ideal situation when, if possible, your wants are a smaller percentage of your income which allows you to save more or even take a vacation to Malibu.

Regardless, it is important to budget since it helps one know where they are financially, where they want to be, and what they can do to get there or free up finances.

Therefore, according to each person's needs and wants, the rule is not a one-size-fits-all but more of a guide on how to allocate different amounts in each situation. The figures in each category are not constants and can change at any time. If your landlord increased your rent by 10%, you would have to free up some of your finances from your wants or savings. 

While budgeting is important, one should remember that you should not struggle too much to make your budget fit certain thresholds. Do what is comfortable for you and that will help you work without pressure towards your financial goals.