Lucas Brenner » Articles » The Only Financial Rule You Need

The 50/30/20 rule is the only rule of thumb you need to organize your personal finances. You need a checking account and a way to save money to use this rule. Optimally, you'll have a checking account to save money and a stock portfolio to invest money for the long term.

The 50/30/20 Rule

With this rule you divide your net income into three parts to save more. 50% of your income should be spent on necessities, such as rent, food or insurance. 30% you can spend on pleasures and desires, for example on eating out, vacations or Netflix. The remaining 20% of your income you either use to pay back debts or you save it. Saving makes you more financially independent and crisis resistant. For example, if your washing machine breaks, you'll have a financial buffer.

Applying the Rule

First you need to determine your monthly net income, which is calculated from your income minus all taxes. You'll then use that number to calculate the budget for your three baskets.

Next, you should write down your expenses for at least one month and assign them to one of the three baskets. To get more reliable numbers, it is best to track your expenses for three months. The result will show how your current expenses are distributed.

If this distribution is not yet in line with the 50/30/20 rule, you can now look for ways to save money. Do you really need three streaming subscriptions? Do you eat out too often? Try to stay on budget in the coming months.

Using Monthly or Annual Income for Calculating?

If you use your monthly income to calculate your baskets, you have the option to start fresh each month. If you use your annual income, it's easier to compensate for unforeseen expenses in one of the baskets. However, this planning is very long-term and therefore especially confusing at the beginning of the year.

I calculated my baskets with my monthly income, because these numbers are more realistic and can be checked in the short term. You have a better overview if you know how much money you can spend on pleasure each month, for example.

At the end of the year, you can then calculate how much money you spent in each basket last year. The advantage here is that exceptions and emergencies can be better compensated. So, it's not a big deal if you overspend in one month, because it doesn't matter so much on average over the year. Nevertheless, you should of course stick to the budget as best you can.