When you’re new to budgeting, it can be really difficult to figure out how much money you should be spending on each area of your life.
How much should we be spending on rent? Groceries? And how much can we spend on fun things like nights out and vacations?
I remember moving to a new city after college and being so stressed looking for an apartment because I had no idea what my budget should be!
My favorite budgeting method for beginner budgeters is the 50/30/20 rule, which lays out what portion of your monthly income you should be spending in each area of your life.
In this post, I’m sharing what the 50/30/20 budget rule is and how you can make it work for you.
What is the 50/30/20 budget?
The 50/30/20 rule is a budgeting method where you break down your after-tax income into three categories: Needs, wants, and savings/debt.
50% of your take-home pay goes toward needs. 30% goes toward wants. And the remaining 20% goes toward paying off debt and putting money into savings.
Let’s dive a little deeper into each of those spending categories.
50% – NEEDS
Needs are the monthly living expenses that you have to pay in order to keep going. Your needs include:
These expenses will vary a little bit from person to person, but we all have the same basic expenses when it comes to this category.
30% – WANTS
Wants are those totally optional expenses that you choose to spend your money on. Consider this your “quality of life” category, because it’s the items you spend money on to reach the quality of life you want.
Your wants include:
- Eating and drinking out
- Clothes shopping
- Gym memberships
You get the idea. It’s all of the things you choose to spend money on, not that you have to spend money on.
20 % – SAVINGS AND DEBT
The last 20% is reserved for just two things: debt repayment and savings.
First, this category will help you to pay off any debt you have, including credit cards, student loans, auto loans, personal loans, and more.
This is also the money that will go toward helping you build your emergency fund, pay for any financial goals you have, and funding your retirement account.
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How to implement a 50/30/20 budget
Alright, let’s say you’ve read about this budgeting method and decided you want to give it a shot. How do you get started? Here are some simple steps to follow:
STEP 1: FIGURE OUT YOUR AFTER-TAX INCOME
Before we can budget our income, we have to figure out how much money we have to budget with. This part should be easy – simply take a look at your paycheck or bank account and see what you’re after-tax income is each month.
This is a little more difficult if you don’t make exactly the same amount of money each month, such as if you’re self-employed. In that case, just work with your average take-home pay.
STEP 2: MAKE A LIST OF YOUR MONTHLY EXPENSES
The one thing you need to do before creating any kind of budget, not just a 50/30/20 budget, is to make a list of all of your expenses.
I like to go back 3-6 months and make a list of everything I spent money on. Seriously, everything. Account for every single coffee, cocktail, and concert ticket you’ve bought.
STEP 3: BREAK YOUR EXPENSES INTO NEEDS, WANTS, AND SAVINGS/DEBT
Once you’ve made a list of all of your expenses, it’s time to categorize that list. Using the three spending categories (needs, wants, and savings/debt), divide up your expenses.
It might be most helpful to use a spreadsheet with three columns so you can add each expense to the appropriate column.
STEP 4: ADJUST YOUR SPENDING
Here’s where you may need to make some changes to your spending habits.
Once you’ve broken your expenses up into categories, add them up. How much have you been spending on needs every month? On wants? On savings and debt?
If you do the math and it’s not fitting into the 50/30/20 budget, it’s time to adjust.
It might be that you have a luxurious apartment that causes you to spend a higher percentage of your money on rent. Ask yourself – could you be living in a more affordable apartment?
For myself, I find that I spend too much on wants – specifically eating and drinking out and concert tickets. So those are the areas I try to cut back on.
Remember, you don’t have to follow the 50/30/20 rule exactly.
Here’s the rule of thumb I like to stick to: It’s okay to spend less than 50% on needs. It’s okay to spend less than 30% on wants. It’s not okay to spend less than 20% on debt and savings.
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50/30/20 budget example
Let’s say you have a take-home pay of $3,000.
Using the 50/30/20 budget rule, you have $1,500 to spend on needs. The biggest expense to come out of that will almost certainly be your rent or mortgage. If you live in an area where housing is more expensive, try to run some numbers and see if there’s a way you can reduce your other bills.
Next, you’ll have $900 to spend on wants. These are expenses that are totally optional. If $900 seems like more than you need to spend on your wants, I encourage you to shift some of this money toward your needs or, even better, toward your debt repayment.
Finally, you’ll have $600 to spend on savings and debt repayment. This money is to be used for two things: money and paying down debt.
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When the 50/30/20 budget doesn’t work
I think the 50/30/20 rule is a great budgeting method, but it doesn’t work for everyone.
First, this method might not work if you live in an area with a high cost of living or if you have a low income. In both of those cases, you’ll almost certainly be spending more than 50% of your monthly income on needs.
The 50/30/20 budget also might be problematic for those with a lot of debt. Millennials and Gen Z-ers with student loans, I’m talking to you!
Many people have a minimum payment on their loans that makes up 10-20% of their take-home pay. So to have just 20% of your budget going toward debt repayment and putting money into savings probably isn’t going to cut it.
Finally, the 50/30/20 budget doesn’t work forever. It’s a great reference point for new budgeters and people earlier in their lives, but you’ll have to adjust over time.
As you get older, your financial goals will become more customized. Your income might increase without your needs increasing. You might have loftier financial goals. And finally, this budgeting method is not conducive to those trying to aggressively save for retirement.
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Hopefully, this post helped you to figure out what the heck a 50/30/20 budget is and whether or not it’s for you.
This type of budget is great for beginners who are just getting started and really need a framework to fit their budget into.
It’s not for everyone, but that’s okay! Your budget needs to work for YOU!