50-30-20 Rule: cleverly save money + build capital

Save money, build up capital, maybe even a small fortune? With the 50-30-20 rule, it works even on a small income. The formula helps to keep better track of one’s own expenses and account balance, as well as to manage more consciously. All it takes is consistent planning and the necessary self-discipline. We show you how the 50-30-20 rule works and how you can optimize your finances with it..

➠ Contents: What you can expect

What is the 50-30-20 rule?

The 50-30-20 rule is a simple formula for saving money and building up capital – regardless of how much you earn. The disposable income and salary is distributed among three differently sized areas of expenditure and savings. The goal of the 50-30-20 rule is to get a better financial overview of one’s finances and to organize the monthly budget consistently so that there is money left over.

It is crucial that you do not make an exception. Christmas or vacation bonuses must also be divided according to the 50-30-20 rule.

How the 50-30-20 formula is composed?

According to the 50-30-20 rule, you structure your net income into three categories: The first part, amounting to 50 percent, is earmarked for basic expenses and fixed costs. The second part at 30 percent is used to finance personal needs. The remaining 20 percent is used for savings or debt repayment. In concrete terms, it looks like this:

Fixed costs (50 percent)

The largest item is the basic expenses that occur every month. This primarily includes:

  • Rent
  • Electricity and gas
  • Insurance
  • Internet, television, telephone and smartphone contracts
  • Food
  • Fill up the tank

Calculate exactly what you need for this purpose – and whether savings are possible. For example, by moving when it comes to rent or by changing providers when it comes to electricity and insurance costs. Price comparison portals help here. The goal is to spend no more than 50 percent of your net disposable salary on these basic expenses.

Personal needs, leisure and desires (30 percent)

This category includes all expenses that are not essential to life, but sweeten your life or help you participate in social life. They are therefore also called "leisure expenses" or lifestyle expenses. This includes, for example:

  • Restaurant visits
  • Shopping and clothing
  • Cultural activities
  • Consumer electronics

What you spend the money on, decide alone. Nevertheless, you should keep a close eye on these expenses and keep regular records of them. Again: More than 30 percent of income may not exceed this in the month!

Savings portion (20 percent)

According to the 50-30-20 rule, you now have 20 percent of your salary left for the piggy bank that has not yet been earmarked. This fifth can serve different purposes:

  • Savings and wealth accumulation
  • Repayment of debts
  • Reserve for emergencies
  • Private old-age provision
  • Preparation for a real estate purchase

Debt repayment is given priority Before the savings goals. Only when all debts have been paid off does it make sense to save money. But if you save appreciably, you can afford more in the future.

Example calculation for the 50-30-20 rule: 2000 Euro net

The following case illustrates the effectiveness of the 50-30-20 rule. We assume an average net income of 2000 Euro per month. A division of the budget according to the 50-30-20 formula would then look like this:

  • 50 percent fixed costs: 1000 Euros
  • 30 percent Personal expenses: 600 Euro
  • 20 percent savings portion: 400 Euro

If you save 400 euros a month, you can even accumulate up to 4800 euros a year. Even if you calculate generously and allow for surprise expenses of 1800 euros per year, there will still be 3000 euros left in reserves minus expenses. And that without having to give up vacations, going out, shopping sprees or the like to the tune of 7200 euros a year. Irrespective of any interest, this will allow you to save at least 60.000 Euro of capital – most likely even significantly more.

How much to save with 3000 Euro net?

As your net income increases, the amounts for the different areas also adjust. With an income of 3.000 euros results in a savings portion of 600 euros per month. Sounds like a lot, but the percentage distribution remains unchanged. So you have for fixed costs 1.You have 500 Euros at your disposal and can plan 900 Euros per month for leisure expenses and your personal needs.

50-30-20 rule: experiences and reports

The experiences with the 50-30-20 rule are very positive. There are various testimonials that testify to an improvement in one’s own financial situation. A big advantage for most: the ease of use. The concept is easy to understand and after some initial organization, it is possible to allocate costs to the three areas without much effort.

Of course there are also points of criticism. So there are some experiences that see an implementation of the prescribed limits – especially with small net salaries – difficult to impossible. Who for example only 1.200 euros net available and should consider 240 euros of it as a savings rate, may have difficulty covering its costs.

Why the 50-30-20 rule works?

In fact, with the method, which is ultimately derived from the Pareto principle, it is relatively easy to build up solid capital after a short time (or debts are reduced). On top of that, you have your income and expenses or monthly costs much better in view than before. Further advantage: The fast successes motivate you additionally. You can even overcome financial bottlenecks with the 50-30-20 rule. The whole thing only works, however, if you stick to the distribution of your income in a consistent and disciplined manner.

Admittedly, this is not easy with some incomes. But you can succeed by taking the 50-30-20 formula as an opportunity to subject your expenditures to a critical check. You may be living beyond your means, or you may need to reduce spending in some areas. You do not have to. However, if you want to put money aside and save capital for the future, you generally cannot avoid cutting back on consumption in the present.

Without consistency, the 50-30-20 rule does not work

Perhaps you will not always manage to calculate the monthly amounts to the penny according to the percentages stated. Can happen and is not bad, as long as the basic rules are considered over the year are kept. To save and build up significant capital, 20 percent a month is essential – even if it’s difficult. If you can not meet the savings target, you should not question the formula immediately.

The real question is: In which other places do you spend a large part of your money – and can costs be reduced there in order to be able to save more money?? This may be a small cut today or cost some quality of life. In the future, however, you will have all the more leeway and come a good deal closer to your goal of financial freedom.

Now it may be a smaller apartment, but in ten years you can finance property and in 30 years live rent-free. Discipline is essential. But on the other hand, don’t limit yourself too much. The motivation to save must be maintained and, of course, you are allowed to treat yourself to something.

Tips: How should I divide my salary?

After so much theory, it’s time to get practical. For the rule to work, you ultimately need to review your fixed costs and expenses for potential savings. You can do this, for example, with the following tips:

Reduce fixed costs

50 percent of income is a huge amount, but with sometimes very high fixed costs, it can be quickly exhausted. Therefore, it is imperative that you check your basic expenses at regular intervals – for example, always at the end of the year. Take stock of your finances and scrutinize your spending: Is there a cheaper provider – for electricity, gas, cell phone tariff? Are all insurances really necessary or has one become superfluous or cheaper elsewhere? Use consumer portals and comparison portals such as Check24 or Verivox for this purpose.

Some people find it helpful to keep basic expenses in a separate household account, to which 50 percent of income is booked each month by standing order. This provides a better overview. During this process, it is crucial that you differentiate exactly which expenditure really belongs to your basic needs and which expenditure enriches your life, but is not essential to it.

Keep a budget book

You will get a good overview if you keep a budget book. Current and future expenses are entered in it. This regular control allows you to record changes (compared to previous months) at any time and get a grip on the budget. Savings foxes discover thereby also still so some savings potential.

Plan ahead for expenses

Some expenses come suddenly and unexpectedly, but many can be foreseen some time in advance. The refrigerator is getting on in years? The washing machine is slowly giving up the ghost? The car sputters regularly? Plan for such expenses early on. You can set aside a specific amount of the savings portion or reduce spending on personal needs over a few months to have more money left over at the end of the month.

Build up a nest egg

In addition to organized finances, one goal of the 50-30-20 rule is long-term wealth accumulation through the savings component. However, you should first build up a so-called nest egg before investing money in shares or real estate, for example. As a rule of thumb, set aside enough money – for example, in a separate account – to cover your current expenses for three to six months.

This way you are prepared for all emergencies and have a financial reserve. Set up a monthly standing order to a savings or call money account until your nest egg is reached.

Financial planning via smartphone

You can further optimize your financial planning according to the 50-30-20 rule with the help of one of many financial planning apps. You can find appropriate programs in your appstore. For example "MyBudget", "Moneywyn" or "Mint.com" mentioned. There you can enter even for each family member individually the expenditures into the categories fixed costs, personal expenditures and savings portion. You will be shown immediately which share is what percentage and whether you manage to stick to the 50-30-20 rule.

50-30-20 rule: alternative to saving

The 50-30-20 rule is a widespread and popular option for financial optimization and long-term asset accumulation – but it is not the only option or the silver bullet. There are various alternatives, some with other spending areas, some with other quotas can bring order into the financial chaos. What almost everyone has in common: You can’t do it without a set savings and investment ratio.

Put another way: Money must be left over at the end of the month. If you use up all of your income each month, you won’t have anything left over in the long run either. Then there are only two options: Increase earnings or reduce expenses.

60-30-10 rule as an alternative

An alternative similar to the 50-30-20 rule is the 60-30-10 rule on finances. In doing so, you divide your salary among three different accounts that are used for different purposes.

  1. Consumption (60 percent)
    The majority of your income is used for consumption. This part describes all monthly fixed costs, but also additional expenses for leisure time or other purchases. From this account you pay all running costs and cover your living expenses.
  2. Investment (30 percent)
    A comparatively large part of 30 percent is reserved for investments in this concept. This includes direct financial products and investments in stocks – but also personal training to expand your skills and build knowledge.
  3. Saving (10 percent)
    The last ten percent is your savings rate according to the 60-30-10 rule. From this you put something aside for short-term emergencies and build up the nest egg mentioned above.

Advantage of this method: You invest a large portion of your income, allowing you to make significant investments over several years. But there’s a big catch: you only have 60 percent of your income left to live on.

The 50-30-20 principle – also for the self-employed

The 50-30-20 rule is suitable for every stage of life and every professional situation. If you work as an employee, it is particularly easy to apply: The net income remains the same every month. If you are self-employed, the 50-30-20 formula works the same way: you just have to calculate your average net annual income and divide it by twelve. But do not forget to include in the fixed costs the share of irregular charges, such as advance tax payments and additional payments. Even months with low sales can be balanced out in this way and you will be spared any nasty surprises.

The 50-30-20 rule is effective when applied consistently almost automatically helps you to keep your good resolutions. It can be a valuable support on your way to a small fortune or to financial freedom. It is very easy to understand, to apply and gives you even with comparatively small income in the course of the time a considerable capital gain.

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