How to use the 50/30/20 Rule with low income?

Hello! In this article I will explain how to use 50/30/20 Rule for managing your Money if your income is too low. If your monthly income is only enough to pay for the essentials, it may seem impossible to start using the 50/30/20 rule. But there are certain things you can do to make it work for you. Let’s have a closer look.

If you don’t know anything about 50/30/20 Rule, let me quickly explain it.

The 50/30/20 rule is a great formula to help you manage your money. (You can learn more about the Rule here). It tells you how to divide your money into three categories: needs, wants, and savings. This way, you can make sure you’re spending your money wisely and saving for the future. Here’s how it works:

1. Needs. 50% of your income after taxes should go to things you absolutely need, like food, shelter, and clothing.

2. Wants. 30% of your income goes to Wants. It means you can spend them on the things you want, like dining out, shopping, entertainment or vacations, and you don’t need to feel guilty about it.

3. Savings. 20% of your income should go to Savings: you should save them for the future or for emergencies.

Very simple, right?

But how do you apply 50/30/20 rule if your income is only enough to cover your basic needs??

What if 100% of your income goes to pay for the food and for the housing?

I know this situation very well, because when I was a child, my parents had very small salaries. The total family income was only enough to pay for the apartment and to buy some food. I would normally receive a pair of shoes as a Birthday present, and the other clothes I was getting after my older cousin. I’ve been there.

So, is it possible to apply the 50/30/20 rule in this case? Not really.

What is the most common misinterpretation of the 50/30/20 rule?

It’s easy to misinterpret the rule and make a mistake.

The most common misinterpretation is that the Rule prescribes that you must spend 30% on wants and 20% on savings no matter what income you have. This is wrong 🙂 The reason is very simple – if I have a low income and I spend 30% of my money on Wants, I will not be able to pay for the essentials, and I will get into debt very quickly. Is this what the Rule wants? Of course not.

We need to keep in mind that the 50/30/20 Rule is meant for a healthy financial planning and management when our income is sufficient.

If your income is only enough to pay for the essentials, you will need a bit different approach to the percentages.

Here are some suggestions for how to work with the 50/30/20 rule when your income is too low:

1. Reassess your needs. Take a close look at your essential expenses to ensure they are truly necessary. Maybe you can find ways to reduce costs, such as cooking at home instead of eating out, using public transportation or bicycle, or cutting back on non-essential subscriptions.

2. Adjust the percentages. If your income primarily goes to your basic needs, you might need to modify the 50/30/20 rule to better suit your circumstances. It is OK to adjust the percentages to fit your current financial situation, perhaps by allocating more to needs and less to wants and savings until your income increases.

3. Find additional income sources. Look for ways to increase your income, such as taking on a part-time job, freelancing, or learning new skills to apply for a better job. As your income grows, you can gradually start applying the standard 50/30/20 rule.

4. Focus on debt reduction. If you have outstanding debts, especially high interest debts, prioritize paying them off. Doing so will reduce interest payments and eventually free up more money for wants and savings.

5. Save on wants. Be resourceful and look for low-cost or free alternatives to satisfy your wants. For example, instead of buying a book you can borrow it from the library, instead of dining out you can prepare the meals yourself and make a special dinner for your family at home, or take the food to the park and make a picknick. It will still be fun, but you will pay significantly less. Remember, this is a temporary solution until your income increases and you will be able to apply a standard 50/30/20 rule.

6. Emergency savings. Even if your income only covers your basic needs, it’s crucial to save a small amount for emergencies. Try to set aside at least a small amount from your needs category to build an emergency fund over time. It will help you to avoid debt in case of urgent medical or other expenses.

7. Seek assistance. It’s perfectly okay to seek help during challenging financial times. First of all, there are many free resources available like government assistance programs, non-profit organizations, financial literacy workshops, don’t hesitate to use them for your benefit. Secondly, it’s good to know that you are not alone, there are many others people who have faced similar financial hardships and managed to get through. Try to find such people and connect with them, they can provide valuable insights, motivation, and guidance to help you improve your own financial situation and ultimately achieve financial stability.

As your situation improves, you can gradually work toward implementing the standard rule for a more balanced financial future.

Let’s summarise.

50/30/20 rule is a great tool for managing your money, but if your income is only enough to pay for the essentials, you will not be able to use it in a standard form. You will need to adjust the percentage and focus on increasing your income and reducing the expenses. In the future, when your financial situation improves and your income is good enough, you may decide to dedicate even more to wants and savings. For example, when 20% of your income will be covering all your needs, you will be able to spend 40% on wants and other 40% on savings and investing.

Hope it helps. Have a great day!