Creating a budget is the best way to ensure that you pay your bills, save for the future, and have some fun along the way. Sadly, many people approach their finances in a much more scattered way. “I’ve paid my bills, and now I can play!”

Instead of socking away money for a rainy day, they purchase new cars and install backyard pools instead of saving for their children’s education. The good news is that with some planning, you can manage your money in a way that works for you.

One such budgeting tool is the 50/30/20 Rule, where your spending and savings are assigned percentages. These guidelines are a great way to budget your money more efficiently and reach your financial goals.

What is the 50/30/20 Budgeting Method?

Everyone has advice on budgeting your money, but only you know what is best for your situation.

The 50/30/20 Rule is a suggested plan that encourages living within your budget and saving for the future. It considers your needs, allows for your wants, and doesn’t let you forget about savings or debt repayment.

In a nutshell, the 50/30/20 Rule advises spending 50% of your take-home income on needs, 30% on wants, and 20% on savings or paying off debt. This balanced approach doesn’t make you feel like you are deprived.

Where Did the 50/30/20 Rule Come From?

United States Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, published a book in 2005 called All Your Worth: The Ultimate Lifetime Money Plan. Their goal was to provide a tool for working-class families to plan and organize their spending and savings goals. In the book, she wrote about the 50/30/20 Rule. Since then, it has become a popular way to manage your money. 

First, you determine your monthly income after income taxes and other deductions. Then you define your needs and wants, set money goals, and strive to stay within the percentages. 

How to Budget Your Money with the 50/30/20 Rule

For some, the word budget is an ugly word meaning restrictions, but that doesn’t have to be the case. Writing down where your money comes from and where it goes is a freeing experience. It brings awareness to your spending.

For example, if you go to dinner a few nights a week, you may not realize how much that is monthly. Similarly, if your bills are automatically paid out of your checking account, you may not be aware of price hikes or extra fees.

The first step in budgeting is finding out where every dollar goes. Take a few weeks or months to track each bill and expenditure.

While you are wondering why you can’t buy a new iPad, you may realize that Starbucks habit would have paid for it twice. We are not bashing your Starbucks habit, but things like that add up.

Once you’ve tracked your cash flow, categorize each item into a need or a want. What do you need to live, and what could you live without if you had to? This is different for each person.

A cell phone might be a need, but the latest iPhone with 17 paid apps is probably a want. A car might be a need, but the 2023 Porsche is a want.

Some banks have a system set up to make the 50/30/20 Rule easy. You can log into your account, categorize your bills into needs and wants, and get a snapshot of your budget. Otherwise, you will need a spreadsheet, an app on your phone, or paper and pen.

Let’s see what goes into each category in the 50/30/20 Rule.

Spend 50% of Your Money On Needs

Needs are things you need to survive. This includes rent or mortgage, utility payments, basic groceries, insurance, and transportation. It could also include your telephone, depending on what it’s used for. 

If you bring home $3,000 a month, your goal is to allocate $1,500 of this (or less) to your needs. For some, this might be easy, but for others, this might be a challenge.

The key will be to look at each of these expenses and see where to trim costs. If you are starting with this plan, you might need to allocate some of your “wants” money toward these needs. This is temporary until you get the numbers ironed out.

While it’s called the 50/30/20 Rule, your needs might dictate a 60/20/20 Rule. That might work well for you.

Spend 30% Of Your Money On Wants

Wants are things that it would be nice to have but you could live without them. These are your discretionary income and might include clothing, gym memberships, dinners out, boats, and vacations. Birthday and holiday gifts are often lumped into this category as well. Some also include charitable giving in this category. 

In our example of a $3,000 total budget, $900 would go toward wants. As we mentioned above, needs come before wants, so if you don’t have enough in the Needs category to pay for actual needs, you will need to forgo wants for a bit.

The appeal of this plan is that if your needs and savings are met, you can feel free to indulge in your wants. You can choose to get a spa treatment or stash some money away for a cruise.

Stash 20% Of Your Money For Savings

Your income will be set aside for savings and debt repayments. These include an emergency fund, credit cards with outstanding balances, different retirement plans, college funds, or the down payment on a house. In our example, $600 of your take-home pay would fall into this category. 

A few words about debt: some put minimum debt repayments in the needs category and part of the savings to pay off excess debt. Just because this goes to pay off debt does not mean that you can charge a want and pay it through this fund. These savings are for emergencies and your future. The idea is to get out of debt, live within your means, and then save for long-term goals.

Also, this category is not meant to pay for wants or needs unless necessary. First, pay for needs, then savings, and then wants. 

Using direct deposit is a good practice to ensure you save money. When your paycheck or income is deposited into your checking account, take 20% and automatically divert it to a savings account. Automatically deduct your needs from your checking account and then use the remainder for wants.

Importance Of Savings

A savings account will give you peace of mind and prepare you for the unexpected. It’s a terrible feeling when your pet gets sick and requires urgent treatment, the water heater breaks down, or your car doesn’t start. It’s an even worse feeling when you don’t have enough to pay for it.

At the very least, you should have an emergency fund. There are different schools of thought on this. You can start with $1,000 and build up to three to six months’ worth of living expenses as long as you have retirement savings and have paid off any long-term debt.

If you use your emergency fund or savings plan for an unexpected expense, you should focus on replenishing it over the next few months. Think of it as a little loan to yourself.

A larger savings account will also ensure you have money to live on if you lose your job. In today’s economy, you should always be prepared; a savings account is a great way to do this.

How to Budget With the 50/30/20 Rule

Budgeting with the 50/30/20 Rule is as simple as calculating your income, categorizing your spending, and adjusting the numbers so your needs, wants, and savings work for you.

After you take time to figure out your budget, you can rest assured that your money is in the right place, you can pay your bills each month, and you are prepared for emergencies and retirement.

Calculate Your After-Tax Income

Your after-tax income, or post-tax income, is the amount of money you bring home. If you work for an employer, they pay you a salary, take out taxes, might take out money to pay for health insurance, and you might elect to divert money into a retirement savings plan.

If you work as a freelancer, you calculate what you earn monthly and take out business expenses and taxes. This might take you a bit longer to calculate. 

This monthly after-tax income is what you will use as a starting point for your budget.

Categorize Your Spending For the Past Month

If you are like many, you use your debit or credit card for most expenses. Some of your bills may also be automatically deducted from those same accounts. This makes it easier to track your cash flow. Pull out your bank account statements and bills for the past month and look at each dollar spent. 

Alternatively, save your receipts and enter your spending into a spreadsheet, piece of paper, or an app on your phone. You want to keep track of every penny for this period of time. You might not think a dollar or two matters too much, but it can add up in the long run.

Put the money into categories. Which items are needs—meaning that you cannot survive without them? Hint–you may think you can’t survive without Netflix, but you could if you had to. If you’re already transferring money into a savings account, give yourself a high five! You’re ahead of the game.

If you have a retirement account at work that you contribute to, this is awesome. Some use this as part of the 20% savings, but you want savings that you can access, so stick some in a savings account. Everything else you spend money on is a want.

Evaluate and Adjust Your Spending to Match the 50/30/20 Rule

If your needs fall into the 50% allocation, you up your savings to stash away that 20%, and have some leftover to satisfy your wants, you’re on the right track. If you are spending more on wants than needs or savings, you must make some choices.

If you make cuts and your needs don’t fit the 50% rule, don’t panic. Depending on what area of the country you live in, your numbers might not immediately fit into this budget. You still have plenty of choices. 

To lower house payments, check out refinancing options, get a roommate, or rent a space as an Airbnb. Shop around for cost-effective insurance plans for your house and car.

Carpool or take the bus to cut transportation costs. Ask your utility company about budgeted billing to avoid electric costs’ ups and downs.

Invest in solar panels to offset electricity costs. Explore ways to eat at home and pack your lunch—eat in season, grow your own food in a garden, or use coupons. 

You can also increase your income by selling goods or services, working overtime, or getting a second job. That way, you’ll have more to fulfill your needs, wants, and savings goals.

There are a couple of things to remember with the 50/30/20 Rule. These percentages are guidelines and not set in stone. If your circumstances do not perfectly fit these percentages, that’s ok.

After you pay for your needs and stick money in savings, you might designate money to charitable giving or faster debt reduction. The choice is up to you.

The Bottom Line

The 50/30/20 Rule is pretty simple to set up and follow. Once you have the original numbers and categories of your spending habits, you’ll need to pay attention to the variable expenses.

Revisit the numbers each month and compare them to your monthly post-tax income to make sure you’re on track. It’s always a good idea to track your spending to see where your cash is going and stay ahead of that pesky credit card debt.

Pay attention to subscriptions that show up only once a year—those are most likely wants. They may fit into your budget, but you should keep track of them, as they can add up quickly.

The 50/30/20 Rule is only one of many budgeting options to explore. A reasonable budget will consider spending and saving categories and not leave you feeling deprived.

Explore more financial resources and tools here.