How to Budget with the 50/30/20 Rule

by: holli casto
vp of training and development
Published 10/19/2023

Unlike zero budgeting, the 50/30/20 method allows your budget to relax a little bit and outline three broad spending categories for your budget, rather than allocating every single penny toward a specific category.
person budgeting

The 50/30/20 Method

This method simply separates your income into three categories, your needs, wants, and savings and debts. Let's look at how this separates out your income into these three categories: 

50%: Your Needs – This portion of your income goes toward what you can't go without. This includes things like your mortgage or rent, groceries, utilities, childcare, medical expenses, gas, vehicle maintenance and insurance, and so on. 

30%: Your Wants – Also known as your discretionary expenses, these are purchases that you don't have to make but make life more fun! Things like dining out, coffee in the morning, going to the movies, the list goes on. 

20%: Your Savings and Debts – The last portion of your income goes toward your savings and additional payments toward your loans. 

The beauty of this method is that it provides you with guidelines for how much to allocate toward some big categories. Making room in your budget for your savings and additional debt payments make reaching your goals much more reachable.

Furthermore, having a guide for how much of your budget your fixed expenses should take up will help you make more informed choices when searching for apartments, deciding whether you can afford a new car payment or not, and more. And lastly, no budget will succeed if it's all work and no play, that's why it's important to set aside funds for your wants in your budget. 

Why 50/30/20

The 50/30/20 budget method has been around for a while and is popular because of the balanced approach it provides budgeters. Half of your income goes toward your needs, while the other half goes toward your present wants and helps you prepare for the future by allocating funds toward your savings and by putting some extra toward paying off your debts.
That said, if you want to adopt this financial philosophy but these ratios don't work for you, you can use a different ratio. If your needs exceed 50% of your take-home pay, because let's be real, for a lot of us anymore, they do, you can change that number to 65/20/15. The whole point is to ensure you are at least able to allocate some funds toward savings and debt repayment in the end, while still allowing for room for discretionary spending.

Calculating your 50/30/20 Budget

Step 1: Make a plan
Understanding how the 50/30/20 budget works is one thing, but actually putting it into action is another. Every budget begins with determining what your actual take-home pay is. There is a difference between your gross income, your total salary, and your net income, how much you take home after you take out taxes, insurance, and retirement deductions. The simplest way for most people to determine their monthly take home pay is to look at how much you're taking home in your paychecks.

Take your total take home pay and put it in this 50/30/20 budget calculator. For the next steps, your needs, wants, and savings should ideally be these amounts.

50/30/20 Budget Calculator

Next, take a look at all of your expenses from the last month. Grab all of your credit card and bank statements. Categorize your expenses by needs and wants and add them up. Hopefully your needs are adding up to about 50% of your take-home pay, and your wants are coming to about 30%.

Be sure you're being very honest with yourself here, are all of your needs actually needs? While it may feel like you can't go without coffee from the coffee stand down the street from your work, can you make it on coffee you make at home instead? If your wants are exceeding 30%, it might be time to tighten the reins on your discretionary spending.

Lastly, based on the 20% of your income, decide how much you want to put toward additional debt payments and your savings. In the needs categories, you should count minimum loan payments, but here you'll make additional payments toward your same loans, mortgages, or credit cards. We strongly suggest you should put some money away for savings, even if paying off your debt is your primary goal.

Having an emergency savings is imperative to your financial well being, and prevents you from going into further debt. Furthermore, we cannot stress the importance of saving for your and your family's future enough. Even if it's a small amount at the start, the more you save at the start, the more it will matter later.

Step 2: Follow the plan
Following the 50/30/20 budget is pretty simple in the sense that you don't have to categorize every single discretionary expense or fixed expense, they just have to add up to the right amount in the end. That said, throughout the month you do have to keep track of your expenses to make sure you're on track with what you told yourself you'd spend. You can use a spreadsheet or budgeting app to keep track of your expenses.

Once the month is over, put your 20% toward your savings and additional debt payments. We advise you do this at the end of the month just in case you need some of your paycheck to go toward an emergency expense instead of your savings or extra payments toward your loans.

Make Sure It's Working For You

The 50/30/20 budget is a great rule of thumb, and can be a great set of guidelines for those just starting out with budgeting, but it might not work for everyone. If you're finding that you're continually missing your goals due to overspending, you may want to look into some stricter strategies for a little while, while you get a handle on your budget. Strategies like zero budgeting can help you focus on each individual expense and find additional areas to cut back.

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This is for educational purposes only and not financial advice.