Meeting your financial goals doesn’t happen without effort — and a big part of that effort includes deciding on and implementing an effective budget. Whether you are looking to build your savings or work on your debt repayment structure, the best budgeting method might be breaking down your income and spending into clear-cut categories and percentages.
50/30/20 Budgeting Rule: Quick Take
The three categories included in a 50/30/20 budget are needs, wants and savings. When using this budget, you divide your after-tax income between each of the three categories:
- 50% is allocated to needs
- 30% is allocated to wants
- 20% is allocated to savings
Needs include essential expenses like rent or mortgage, utilities, credit card bills and food. The wants category would include nonessential expenses like dining out, shopping and travel. Lastly, savings expenses include deposit accounts or savings for retirement funds or retirement contributions.
Budgeting Under the 50/30/20 Rule
Budgeting your money under the 50/30/20 rule is easy. The first thing to do when figuring out how to use the 50/30/20 rule is to determine your net income. This is the amount of pay you take home after taxes and deductions. Next, divide your net pay into three categories.
Here’s a look at how you would divide a take-home pay of $4,000 after taxes:
- Needs: 50% ($4,000 x 0.50 = $2,000)
- Wants: 30% ($4,000 x 0.30 = $1,200)
- Savings: 20% ($4,000 x 0.20 = $800)
1. Needs: 50%
With a take-home income of $4,000, 50% of your after-tax income would be $2,000. That means you would budget $2,000 each month toward your needs, such as your mortgage, utilities, groceries and fuel. These are costs that you must pay each month or week.
2. Wants: 30%
For your wants — think concert tickets, new shoes, coffee drinks and the newest iPhone — you can allot 30% of your take-home earnings. So with a $4,000 net pay amount, you’ll have $1,200 in discretionary funds to use as you please. Budgeting doesn’t have to mean going without, it just means you are more thoughtful with your spending.
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3. Savings: 20%
When it comes to savings, setting aside 20% can help you build not only an emergency fund but also your retirement plan. 401(k) contributions are pretax and deducted automatically from your paycheck so they would be included in this allotment. The 50/30/20 rule includes any type of savings you want to include. These can be savings accounts, certificates of deposit, retirement accounts and emergency funds.
Is the 50/30/20 Rule Right for You?
Whether the 50/30/20 budget is right for you depends on whether you have income left over after you budget for your basic life necessities. As long as you do, this budget can help you meet your needs and savings goals, with money left over to spend as you like. Keep in mind that you can always tweak the percentages for the spending and savings categories to better meet your financial picture.
- Best for:People who have enough income left over to budget elsewhere after paying for their basic needs like rent and utilities. If you find yourself overspending on nonessentials like shopping trips, expensive dinners, the latest electronics and other luxury items, you might find that the 50/30/20 budget is a good solution.
- Doesn’t work for: People who can barely make ends meet with their current income or who are in between jobs won’t find that the 50/30/20 budget works very well. You need to have enough money left over to put toward the savings and spending categories. To use this budget successfully, you would need to work on increasing your monthly income so you can create room in your budget for wants and savings.
Customizing the 50/30/20 Budget
You can customize the budget to work for you even if you think the percentage categories — 50%, 30% and 20% — aren’t quite right for your financial lifestyle.
For example, suppose you need to allocate more of your budget toward needs, you could try 60%. Then, you could adjust your wants category to 20% and your savings category could stay at 20%. Or you can do any variation, such as 40/40/20 or 75/15/10.
Final Take To GO
The 50/30/20 rule is based on directing 50% of your income toward necessities, 30% toward disposable income and 20% toward savings.Using this type of percentage-based budget can help you meet and even exceed your financial goals. When building your budget, and hopefully your bank account, the 50/30/20 budgeting rule might just be the monthly budget that works best for you.
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FAQ
Here are some answers to frequently asked questions about the 50/30/20 budgeting rule.
- What is the 50/30/20 rule with an example?
- The 50/30/20 rule is when you divide your after-tax income between the categories of needs, wants and savings. Needs include essential expenses like rent or mortgage, utilities and food. Wants include nonessential expenses like dining out and travel. And savings expenses include deposit accounts or savings for retirement.
- Here is a look at how this works. This example uses a take-home pay of $4,000.
- -50% or $2,000 is allocated to needs.
- -30% or $1,200 is allocated to wants.
- -20% or $800 is allocated to savings.
- What is the 75/15/10 rule?
- The 75/15/10 rule uses the same methods as the 50/30/20 rule, however, it breaks down the percentages differently. In this case, 75% is allocated to needs, 15% to wants and 10% to savings.
- What is the 50/30/20 rule weekly?
- To use the 50/30/20 rule on a weekly basis, calculate your weekly after-tax income and put 50% towards needs, 30% towards wants and 20% towards savings.
- What is the 50/15/5 rule?
- The 50/15/5 rule is when you divide your after-tax income into categories -- 50% goes to essential expenses, 15% goes to retirement savings and 5% goes to short-term savings. What you do with the remaining 30% of your income is left up to you.
Caitlyn Moorhead contributed to the reporting for this article.
