50/25/25 savings rule: A simple budgeting strategy for financial success (2024)

FAQs

50/25/25 savings rule: A simple budgeting strategy for financial success? ›

Originally, the 50/25/25 method designates 50% of your paycheck (weekly, biweekly, monthly, etc.) to your bills (rent, phone, car), 25% of your paycheck to your long-term savings account and the last 25% to leisurely spending (ordering out, shopping, etc.).

Invest 50% of your salary for your future. Set aside 25% for taxes. Spend the remaining 25%

The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.

The rule is a template that's intended to help individuals manage their money. It balances paying for necessities with saving for emergencies and retirement. Those who want to follow the 50-30-20 rule can simplify it by setting up automatic deposits, using automatic payments, and tracking changes in income.

It is a straightforward way to save. The 50 and 30 allows you to spend on essentials and items of your choice and the 20 allows you to save and pay off debts.

Cons. Risk of overspending. Allocating 30% of your income for non essential wants is a large amount of money, especially when compared with only 20% toward savings. Try not to spend money on things that aren't important.

The rule of 25 says you need to save 25 times your annual expenses to retire. To get this number, first multiply your monthly expenses by 12 to figure out your annual expenses. You then multiply that annual expense by 25 to get your FIRE number or the amount you'll need to retire.

A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.

“Ideally, your savings should reach $20,000 by the time you turn 25,” says Bill Ryze, a certified Chartered Financial Consultant (ChFC) and board advisor at Fiona. The national average for Americans between 25 and 30 years of age is $20,540.

Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000. 30% for wants and discretionary spending = $1,500.

Is the 30 rule outdated? ›

While the world of personal finance provides a percentage guideline for how much of your money should go toward housing, this rule is a little outdated in 2024. Rent prices are down from their peak in August of 2022, but they're still dramatically higher than before the pandemic.

Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.

Consider options like sharing an apartment, renting a smaller space or living in areas with lower cost of living. For utilities, be conscious of your energy consumption to keep bills low. Use energy-efficient appliances, turn off lights when not in use and limit the use of heating and air conditioning.

“The 50/30/20 might not cater to individuals with high debt or those living in areas with a high cost of living where essential expenses exceed 50% of their income,” Ronald says.

“Ideally, your savings should reach $20,000 by the time you turn 25,” says Bill Ryze, a certified Chartered Financial Consultant (ChFC) and board advisor at Fiona. The national average for Americans between 25 and 30 years of age is $20,540.

As long as you can take care of your living expenses with 75% of your income, using this guideline can help you use the remaining 25% to work toward a brighter financial future. By remaining flexible, you can adjust the formula to reflect your current circ*mstances and modify it over time as your needs fluctuate.

A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.