The 50-30-20 Budget Rule: What is it and How Can it Help Me?
December 11, 2020 by Daniel Azzoli
Does the thought of budgeting cause tremors to run down your spine? If it does, you’re probably not alone. To many, the idea of sitting down and poring over your finances can be daunting. First off, you might feel like there’s a lot of work involved in putting together a budget. On top of this, the idea of confronting your financial situation can be stressful, especially when money is tight.
The truth is, putting together a budget doesn’t have to feel like pulling teeth. All it really involves is coming up with an outline of how you plan to use your money, and then keeping track of the money you have coming in and going out.
If you’re trying to find a simple way to organize your finances, or you’ve never used a budget before and want to start with a basic format, the 50-30-20 budget might be the right fit for you. All you’ll need to do is follow three straightforward steps that’ll help you prioritize and organize your financial situation.
In this article we’re going to break this budgeting method down, go over the three main steps to creating a 50-30-20 budget, and talk about the importance of saving.
How Does the 50-30-20 Budget Rule Work?
In simple terms, following the 50-30-20 budget rule means that you’ll be categorizing your income (after tax) intro three categories. These include:
- Your needs (50%)
- Your wants (30%)
- And your savings (20%)
How Can it Help Me?
Before we dive into the nitty gritty details, we should talk about why you might want to implement this budgeting method in the first place. For starters, it keeps things simple. If you don’t think you’ll be able to keep up with a more complicated budgeting system, this method is a fairly easy one to start with. Like we mentioned, there are only three categories you need to worry about, and they’re relatively easy things to identify.
Another useful trait of the 50-30-20 budget is that it can help you keep track of every dollar you have coming in. If you follow it diligently and commit to living within your means, it can help you build an emergency fund, pay off any debt you owe, and even save up for big purchases like a house or a car.
How to Create a 50-30-20 Budget
The first thing you need to do when putting together a 50-30-20 budget is to figure out how much money you make after you’ve accounted for taxes. This should include your state and federal taxes, as well as social security and any other similar things that need to be considered. Taking a look at your pay stubs is an easy way to get this number. Once you have this number in hand, it’s time to start categorizing your expenses.
1. Your Needs: 50%
When it comes to your needs, we’re talking about those essential things that you can’t go without. Some of this is probably going to be fairly obvious to you. You’ll want to include things like your mortgage or rent payments, food, any forms of insurance you’re paying for, your utility bills, essential car expenses, and any outstanding installment loan payments (or debt of any kind). What you don’t want to include are things like takeout, vacations, or entertainment of any kind.
If you want to follow the 50-30-20 budget rule, all of your needs are going to need to fit within this 50%. If they don’t, you’re going to need to take a look at how much you’re spending in all of these different areas and see if you have any room to cut back. Ask yourself things like:
- Is it possible to move to a residence with lower rent?
- Can I take public transportation or walk more instead of driving?
- Can I do a better job of saving on groceries?
Some of these things will have to be specific to your situation, but look for ways to cut back where you can.
2. Your Wants: 30%
The wants in your life are a lot what they sound like. They’re the things that you’d like to have in your life, but may not be essential to your survival. This can include things like:
- Movie tickets
- New electronics
- Shopping sprees
This list could include all sorts of things, and a lot of these things may be specific to you, but hopefully it gives you a clear idea of the types of things that fall into this category.
If you’re having a hard time fitting in the expenses that constitute your wants into 30% of your after-tax income, look at what you’re spending money on and see if you can swap out some of these things for lower-cost options. For example, maybe you’re paying $40 a month for your gym membership, but you can get in a similar workout at home. Or maybe you buy a $4 latte on the way to work every day when you could make coffee at home for a fraction of the cost.
The point is, in a lot of cases, you can find a less expensive option if you make the effort. But keep in mind that this doesn’t mean you should completely cut out all of the fun indulgences in your life! The key is to find balance in your life. While you’ll want to maintain a certain level of fiscal responsibility, completely shutting out fun activities might make it harder to stick to your budget, so find some room to reward all your hard work! Finding this balance can be tricky and might take some trial and error, but do your best to stick within the confines of your budget.
3. Your Savings: 20%
While this is the smallest category in the 50-30-20 budget rule, it definitely doesn’t make it the least important. In this context, the savings we’re talking about is the actual money you save, but also the money you’re investing. For example, this could be the money you put aside in one of your bank accounts, but could also include the money you invest in the stock market.
Generally speaking, the money you invest is money that you put towards things that generate some level of additional income. This can include stocks like we mentioned above, but could also include any real estate that you invest in or retirement funds that you put money towards.
If you’re starting from ground zero, the first thing that you should consider tackling is your emergency fund. This is money that you set aside for the sole purpose of dealing with emergency expenses that may unexpectedly crop up down the line. But how big should it be? The rule of thumb is to save between three to six months’ worth of living expenses, but this can vary depending on your financial situation. And if that amount sounds daunting, don’t worry! This isn’t going to happen overnight, and any amount you can put aside is going to help you next time an emergency expense rears its ugly head.
Aside from your emergency fund, you might want to pay special attention to your retirement savings. If you can contribute to a 401(k) through your workplace, try to find room in your budget to do that. You may also want to consider an Individual Retirement Account (IRA).
Finally, make sure you reserve some money to go towards paying off any outstanding debts you may have. Keep in mind that debt repayment definitely falls into the “needs” category. However, in that instance, we’re talking about whatever minimum payments you need to make on those accounts to avoid late payments and potentially going into delinquency. But if you have room to pay off more debt than you absolutely need to (which we would generally encourage you to do if you can), then you can consider that a part of this category of the 50-30-20 budget.
Why is Saving so Important?
Like we mentioned earlier, the savings portion of this budget is crucial, but why? Well, broadly speaking, the money that you manage to save is what’s going to help you accomplish your short and long-term financial goals.
For example, if you want to retire comfortably at some point in your life, you’re more than likely going to need to start saving for it well in advance. And if you want to prepare yourself for the bumps along the road that come in the form of emergency expenses, you’ll need to have an emergency fund at the ready. That’s why it’s such a critical part of any budget and financial plan.
Find Balance in your Budget
Sticking to a budget, especially when you’re new to the idea, might seem like a challenge. But with the right plan in place and a little effort, it’s possible! The 50-30-20 budget rule provides a simple framework for you to work within that accounts for all the money you have coming in and all the money you spend.
If you want to get started but need a little extra guidance, search for a readymade 50-30-20 budget template to help you out. While we don’t think you need to cut out spending completely, working within a financial framework can help to keep your spending in control and save for the future. We hope this helps!