The 50: 30:20 Rule

In life, there are two broad equations when it comes to money. Earning money is one. Spending money is the other. Earning income is the harder but ironically much straightforward side. Your sources of income are clearly stated. Spending however, is the easier equation, and one you should pay close attention to.

It is so easy to just keep swiping and withdrawing till the end of the month. Living that way however, will bring one to ruin. So how should one spend an income? The 50: 30: 20 rule is one of the most commonly quoted. Here is a breakdown of how it works.

50% needs

50% of your monthly income should go towards your needs. Needs are things you can’t do without such as shelter, clothes, feeding as well as payment for your utility bills. If you have kids/dependants, money for their upkeep is a necessity.

30% wants

30% of your income can go towards your wants. Wants are luxury items such as going to the cinema, a pair of designer shoes and the like.

20% investments

20% of your income should go towards your savings/investments. You can either decide to put it in a mutual fund (if it is for savings) or spread across your investments. You can also decide to automate your investments.

Where should charity go to?

A common question I get is what segment should i place my charitable giving? Needs or wants? That would depend entirely on your belief. If you believe charity is a need, you can place under the needs segment. If you believe giving is a want, you can place under the wants segment. The same would apply to tithing.

No hard rules

While the 50:30:20 rule is a good formula for spending, you can always adjust the formula. You could decide to increase your investing to 30% and cut down on wants.

The Challenge: There is so much information out there about managing your money. We’d like to help you understand how to take control of your personal finance.

Money Africa is all about financial education. We want you to learn to make financial decisions on your own. As we go into the new year, go armed with the right information and strategy.