Saving money and even investing money does not only work from a high salary. Everyone can save money with the 50-30-20 rule – even with a small income.

More money is something that a lot of people want. One way to do that is to make more money. The other way is to use your existing income differently. This is where the 50-30-20 rule comes into play.

The 50-30-20 rule breaks net income into three parts: A big chunk, 50 percent of income, for things you need. A portion that’s 30 percent for things you want. And a part that makes up 20 percent for saving and investing.

It doesn’t matter what your income is. Whether you are a low earner, top earner or self-employed: the 50-30-20 rule is about setting a budget that is adjusted to your income as a percentage.

The catch: It’s not easy to stick to the rule. However, if you can do it, you will save a lot of money. We will tell you how the 50-30-20 rule works.

50-30-20 rule: 50 percent for basic expenses

According to the 50-30-20 rule, most of the income is spent on fixed costs. This means that you should spend a maximum of 50 percent of your net income on the things you need to live. These are the basic expenses incurred every month.

This includes:

  • Rent
  • Electricity
  • Water
  • Heating costs
  • Internet
  • Mobile
  • Insurances
  • Fuel costs for the car
  • Food
  • etc.

For items that are slightly variable, such as food costs, an average value is determined.

50-30-20 rule: Reduce fixed costs to 50 percent

With constantly rising rental prices, it is not uncommon for the rent alone to account for 50 percent of the net income. It is extremely difficult to have enough money left over to save.

The solution: You have to manage to reduce rent and other basic expenses so that they only make up 50 percent of income. It’s extremely difficult to keep saving if you have to limit yourself too much.

The first thing that goes away when the fixed costs are too high is not the 30 percent for fun expenses, but the 20 percent that you actually wanted to save.

So that there is enough money left for the beautiful things in life and for saving, the basic expenses must not exceed 50 percent.

If necessary, you have to be prepared to make sacrifices with this 50 percent. That can mean a less fancy car or moving to a smaller apartment. In the short term it hurts, but in the long term you give yourself financial freedom.

Incidentally, the guideline for rent is that the rental costs should make up a maximum of 30 percent of the net income.

Keep a household book: This is how you keep track of your expenses

If you don’t know your basic expenses, you can’t lower them either. The first step is to keep a household book. All expenses (amounts and purpose) are recorded in it.

At the end of the month you can then do a checkout and determine exactly how high your fixed costs are and whether there is potential for savings.

50-30-20 rule: 30 percent for flexible spending

According to the 50-30-20 rule, 30 percent is spent on the finer things in life. These are things that you don’t necessarily need to live, but still want to have or do. However, these expenses are flexible and could be suspended at short notice without sacrificing too much quality of life.

This includes:

  • Clothing
  • Hobbies
  • Vacation
  • Restaurant or bar visits
  • Entertainment
  • Electronics
    etc.

Tip: You should set aside part of the 30 percent for larger expenses. For example, if you want to buy a new piece of furniture or expensive electronics, you can use this savings amount. This ensures that the 20 percent that you need for reserves is not affected by such consumer spending.

50-30-20 rule: 20 percent for wealth accumulation

The last part is the 20 percent to save and invest. The emphasis is on the word “and” . It is important to build up reserves, for example for unforeseen expenses, and to invest, for example in private pension schemes.

You never know when suddenly a car repair, unemployment or an uninsured loss will arise. But you never know what the future will bring, so you can’t rely on one source for your retirement savings. If one way of providing for old age breaks away, you would otherwise be penniless. If, on the other hand, you rely on several sources of income, you also spread the risk.

Wealth accumulation vs. debt reduction

If you are planning a larger investment in the future, for example buying a property, you should also use this 20 percent for this. You can put money aside for a down payment and pay off a loan later.

Caution: If you still have outstanding loans, you should first use the 20 percent to repay them. Debt reduction comes first, then wealth accumulation.

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