Exactly How To Use The 50/30/20 Budget

Budgeting doesn’t have to be difficult or take up a lot of your day. 

In actuality, the simplest budgeting methods are frequently the best. 

Consider the 50/30/20 rule as an example. 

The 50/30/20 rule is an easy monthly budgeting technique that outlines exactly how much you should 
allocate to savings and living expenses each month.

You can safely avoid overpaying and gradually increase your savings with a clear big-picture overview of your monthly budget—all without meticulously keeping track of each and every purchase.

So, you might want to try the 50/30/20 strategy if you’ve ever tried to budget and by the end of the week have already abandoned it. 

What is the 50/30/20 rule?

The 50/30/20 rule is a simple budgeting technique that can support you in managing your money in an efficient, straightforward, and sustainable manner. The general rule of thumb is to allocate 50% of your monthly after-tax income for needs, 30% for wants, and 20% for savings or debt payments.

You can also save yourself the time and frustration of going into the specifics with just three main categories to keep an eye on.

How to budget your money with the 50/30/20 rule

Budgeting is made easier by the 50/30/20 rule, which divides your after-tax income into just three categories: needs, wants, and savings.

It will be simpler to stick to your budget and control your spending if you know exactly how much to spend on each category.
Here is an example of a budget that follows the 50/30/20 rule:

Spend 50% of your income to needs

Simply put, needs are costs you can’t avoid—amounts needed for all the necessities to survive. 
Examples are housing (rent/mortgage), transportation (car, bus payment), insurance (car, house, health), gas and electricity, loan payments, and groceries are some examples.

So for example, if your monthly after-tax income is $2,000, for instance, $1000 should be allocated for your needs.

If you find that your needs total more than half of your gross income, you might be able to make some adjustments to reduce those costs. This could be as simple as switching to a different insurance provider or discovering new strategies for grocery shopping financial savings. A more significant adjustment, may be looking for a less expensive place to live.

Spend 30% of your money on wants

With 50% of your after-tax income going toward needs, the remaining 30% can be used to fund your wants. Wants are things that you choose to spend your money on, even if you could live without them if you had to. They are considered non-essential expenses.

Examples:

Restaurants (fast food, take out, etc.)
Shopping
Gym memberships
Vacations
Subscriptions  (Netflix, Disney, Amazon Prime, etc.)

If your monthly after-tax income is $2000 for example, you can spend $600 on your wants. 

Set aside 20% of your income for savings

With 50% of your monthly income going to needs and 30% going to wants, the remaining 20% can be used to meet your savings goals or pay off any existing debts. Although minimum repayments are considered needs, any extra debt payments reduce your existing debt and future interest, so they are classified as savings.

Consistently putting aside 20% of your monthly pay can help you build a stronger, more long-term savings plan. Whether your ultimate goal is to save to have that fully funded 3-6 month emergency cushion, save for a down payment on a house or invest for retirement you now have those savings! 

How to apply the 50/30/20 rule: a step-by-step guide

So, how exactly do you apply the 50/30/20 rule? To apply this simple budgeting rule, calculate the 50/30/20 ratio based on your income and categorize your spending. Here’s how it’s done:

1. Determine your after-tax income.

The first step in applying the 50/30/20 budgeting rule is determining your after-tax income.

This will be easier if you have a consistent paycheck. Take a look at your pay stub to see how much your take-home pay is per month.  If you need to see an average go back 3 months or so to get a good picture.

2. Sort your spending from the previous month into categories.

To get a real picture of where your money goes each month, look at how and where you spent your income in the previous month(s).   

Now, divide up all of your spending into three groups: needs, wants, and savings. Remember that a need is an expense that you cannot live without, such as rent or your mortgage.  If you need a reminder scroll up and review the examples above.

3.Adjust your spending to meet the 50/30/20 rule.

You can start adjusting your budget to match the 50/30/20 rule now that you know how much of your money goes toward your needs, wants, and savings each month. The best way to do this is to calculate how much you spend each month on your wants.

Resources

Check out the free calculator on NerdWallet to quickly plug in your numbers and see your 50/30/20 allocations.