Your Guide to the 50-30-20 Budgeting Method
The simple format of budgeting known as the 50/30/20 rule became popular with the publishing of a financial book called “All Your Worth: The Ultimate Lifetime Money Plan” written by Senator Elizabeth Warren. The book breaks down and takes a look at a smart way of budgeting your income so you can save money. Since then, the 50/30/20 rule has taken off and is extremely popular with financial experts.
Below is more information and your guide to the 50/30/20 Budgeting Method.
How the 50/30/20 Rule Works
This method of budgeting is very straightforward. First, you’ll need to figure out your after-tax income, or take-home pay. When you have this number, divide your budget into the following categories and percentages:
- "Needs" Spending – 50% of your income should be dedicated to taking care of your needs, which are defined as things that you rely on and cannot realistically do without. Things like mortgage/rent, car payments, food, gas, electricity, and water are all considered needs. Spending in this category is a priority and should not exceed 50% of your take-home pay. If you find it does exceed, you may need to make some changes to reduce your "needs" spending.
- "Wants" Spending – 30% of your income should go to cover your wants. Wants are considered non-essential things you spend on to enhance your lifestyle and can be things like phone upgrades, eating out expensive shoes, or even a cable package.
- Debt/Savings Spending – The remaining 20% of your income should be either placed into savings or used to pay off any credit cards or debt that you owe.
How It's Useful
Absolutely everyone, no matter how much money you make, should be on a budget to keep their finances in check. The 50/30/20 is a simple rule that will work for most budgets, however often people will use it as more of a base to start and then tweak it to fit their financial needs better.
This method of budgeting, if used correctly and with some discipline, helps ensure you don’t overspend in any one category, can adequately cover your needs, and still have room left for saving and paying off debt.
For instance, often we can make poor decisions on spending in the “wants” category, but if we use the 50/30/20 rule to manage our spending, it can help us decide quicker and more efficiently if we can afford (or should afford) the more expensive new laptop, or perhaps spring for a cheaper used one.
Is it Right For You?
While the 50/30/20 rule may work for many different budgets and different income levels, it won’t work for everyone.
Some higher earners feel this type of budget doesn’t allow for enough savings and instead promotes too much unnecessary spending. Lower earners sometimes think that 50% of the budget is not enough to cover standard living expenses. The problem of 50% not being enough can also present in areas where the cost of living can be much higher than average.
There are also those who prefer to break their budget down into more detailed categories and feel the 50/30/20 budget is too simple for their financial needs and savings goals. Those who think this way believe that a budget format that details more about their spending habits can help them stay better organized and more in control of their money.
Either way, the 50/30/20 budget is a good starting point and can help you divide your spending accordingly and save money. Some will use its original structure, but others may change it to fit their needs or use it as more of a baseline from which to build their budget's structure.