Have you tried budgeting in the past, only to give up, blow your budget, and scrap the idea altogether? Maybe you just haven’t found the right budgeting strategy yet.
There’s no one "right" way to budget, and what works for one person might not work for the next. One popular approach is the 50/30/20 rule. Keep reading to learn about this strategy and how to apply it to your own finances.
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- What is the 50/30/20 rule?
- How to budget your money with the 50/30/20 rule
- Spend 50% on needs
- Use 30% on wants
- Put 20% toward savings and financial goals
- How to apply the 50/30/20 rule
- Is the 50/30/20 rule budget right for you?
Sen. Elizabeth Warren popularized the 50/30/20 rule in her 2005 book, "All Your Worth: The Ultimate Lifetime Money Plan," which she co-authored with her daughter, Amelia Warren Tyagi. It caught on because it’s easy to understand and implement. You don’t need to be a financial planner, maintain a detailed budgeting spreadsheet, or pay for pricey budgeting software to use this strategy.
The 50/30/20 rule is simple compared to many other budgeting strategies because rather than tracking dozens of budget categories, you only have three buckets: needs, wants, and savings/financial goals.
Then you allocate a percentage of your after-tax income — 50%, 30%, and 20%, respectively — to each category.
The first category in the 50/30/20 rule is needs, and 50% of your budget goes here. Needs are essentials such as rent or mortgage payments, utilities, groceries, healthcare, and transportation.
For example, if your after-tax monthly salary is $5,000, a maximum of half your take-home pay ($2,500) should go toward these living expenses.
The second category is wants, and 30% of your budget goes here. The wants category encompasses discretionary spending on things like dining out, shopping, vacations, and streaming services.
Essentially, this category includes anything you like to spend money on but don’t really need.
Returning to the last example, if your monthly take-home pay is $5,000, you’d have $1,500 ($5,000 x 0.30) to spend in this category.
The final category in a 50/30/20 budget is savings/financial goals. This category includes things like:
- Contributing to your IRA or 401(k)
- Investing in mutual funds, bonds, cryptocurrency, and other investments
- Saving cash in an emergency fund
This category also includes paying off debt, such as credit cards and student loans. While minimum debt payments are part of the needs category, extra payments that help pay off the principal and hopefully get you out of debt faster are considered savings. This is because, in theory, once you pay off a debt, you’ll have more money to save.
Using the previous example, if your monthly income is $5,000, the 50/30/20 rule gives you $1,000 in this category ($5,000 x 0.20).
Now, say your minimum monthly mortgage payment is $1,200. That $1,200 comes out of the needs category. But if you pay an extra $100 toward your mortgage’s principal balance each month, that $100 comes out of the savings and financial goals bucket.
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If you’re ready to apply the 50/30/20 rule of thumb to your own finances, follow these steps to get started.
Calculate your after-tax income and any additional income
First, you need to know how much you’re working with. Look at how much gets deposited into your account after your employer withholds taxes, your share of health insurance premiums, and other deductions from your paycheck. If you earn income from a side hustle or have other sources of income, add those to your take-home income from your job.
Categorize your spending from the previous month
Reviewing where your money went last month can help you figure out how much you have going into each bucket. It’s also an opportunity to identify any unnecessary expenses that you can reduce or eliminate.
Adjust your budget
Is your spending a little out of whack? See if you can adjust your spending to match the 50/30/20 budgeting rule.
Ultimately, using the 50/30/20 rule successfully comes down to one skill: discipline. You may have to curb some of your spending to free up enough cash to save and get out of debt. Looking for opportunities to cut costs and automating transfers to your savings account can help you meet (or at least get close to) that 20% savings goal each month. A free or low-cost budgeting app can help make tracking your spending in each of these categories easier, but it’s not necessary.
Depending on your current situation, the ideal 50/30/20 split might not work for you. For example, if you’re aggressively paying down student loan debt, you may be allocating more than 20% of your budget to debt repayment, with just a tiny amount going toward wants.
You can still use the 50/30/20 rule. But your budget percentages might look more like 50/20/30, 40/10/50, or some other variation.
The 50/30/20 rule isn’t for everyone.
For example, if you live in a city with a high cost of living, like San Francisco or New York, you may spend a much higher percentage of your income on rent and other necessities, with little left over for your financial goals.
You might want to adjust the percentages to fit your current financial situation and work toward the 50/30/20 split as your income grows. Or, you might prefer another budgeting method, such as:
- The pay-yourself-first method — With this strategy, the first "bill" you pay each month is a transfer to your savings account. After sending a predetermined amount to savings and paying your necessary bills, the rest of your take-home pay is yours to spend as you please.
- The zero-based budget method — With this kind of budget, you assign every dollar of your income to specific categories, including savings, leaving you with a balance of $0 at the end of the month. If you don’t spend every dollar as planned, you can allocate the rest to savings or paying off debt.
- The envelope method — With an envelope budget, you put a specific amount of cash into envelopes representing different budget categories, like groceries, dining out, and shopping. When the envelope is empty, you can’t spend in that category for the rest of the month. If you have any remaining cash in the envelope at the end of the month, you can roll it into the same budget category next month or transfer it to savings.
When the 50/30/20 rule might not work
If you freelance or own your own business, your take-home pay might fluctuate dramatically from month to month, making the 50/30/20 budgeting strategy impractical.
Another situation that can throw your budget out of whack is large, unplanned expenses. Inevitably, everyone faces an unexpected car repair, hospital bill, or another big expense that they haven’t budgeted for but can’t avoid.
How to make the 50/30/20 rule work for you
When unexpected expenses pop up, account for them in the wants category. That might sound strange, but think about it: If you have to cover an unexpected expense, you probably can’t pay for it by skipping your rent payment or tossing your power bill in the trash. Instead, if possible, cut back on dining out, entertainment, and other spending in the wants category that month.
Whether the 50/30/20 rule works for you depends on whether you have income left over after paying for your necessities to allocate to wants and pursuing your financial goals. As long as you do, this method can help you work toward your savings goals while covering basic living expenses and having a little left over for fun.
You can always tweak the percentages even if you can’t meet the recommended 50/30/20 allocation right now. That’s what’s great about this budgeting rule — you can adjust it to fit your unique financial situation.
If credit card debt or student loans take up a significant portion of your income, look into refinancing your student loans at a lower interest rate. Even small steps can lead to substantial savings.
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