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A 50/30/20 budget, sometimes referred to as the 50/30/20 rule, is a simplified way of budgeting that anyone can do. This type of budget divides every expense into three categories:
- 50% towards Needs
- 30% towards Wants
- 20% towards Saving, Investing & Excess Debt Payoff
Use our 50/30/20 Budget Calculator below to see what your monthly budget might look like with this method:
The 50/30/20 Rule of Budgeting Explained
It’s important to know that the 50/30/20 rule pertains to after-tax income. Look at a recent paycheck to see what your take home pay is after taxes. If you are paid bi-monthly (twice monthly), double that figure and enter it into the calculator above.
The categories are comprised as follows:
50% of your income goes towards needs. Needs are essentials that you cannot get by without. This portion of your budget should cover:
- Vehicle payments
- Loan payments
- Any other essential item that cannot be foregone
30% of your income goes towards wants. This category is often self-explanatory and includes things that provide enjoyment in life, such as leisure activities, vacations and more [including, but not limited to]:
- Streaming subscriptions
- Eating out
20% of your income goes towards, savings, investing and debt payoff. Where you are in your financial journey may dictate how to appropriately spend money in this category. If you have an emergency fund of at least $1,000 stashed away (and preferably one that covers 3-6 months of living expenses), it’s time to start tackling high interest debt and then on to investing.
If you have low-interest debt, it may be appropriate to start investing, especially if you’re eligible for an employer-sponsored retirement plan (capitalize on any sort of matching contribution system they may offer).
An Alternative to Complex Budgeting
Instead of making and tracking a dozen different categories, the 50/30/20 budget simplifies this process. It helps people stick to a budget because it only takes a few minutes to put everything in the right category.
This type of budget shows if you’re spending too much on any one category. It reveals where your money is going with a quick glance, and it can also show trends quickly. For example, if you’re spending 35% on needs in one month and 45% the next, you’ll know that something drastic changed.
What the Critics Say
Critics of the 50/30/20 budget say it’s overly simple and doesn’t show enough information.
Another failure with this budget is the 20% Saving & Investing category. If you’re spending 5% in this category, it may be because you’re not contributing anything to your 401(k) and 5% of your income goes to your student loans. If you have a dire loan situation, you may want to allocate more than 20% toward that category.
Who the 50/30/20 Budget is Best For
This budget is best for people who have enough discretionary income that they can afford to spend 30% of their pay on wants and whose needs aren’t outrageous. For example, some people living in a high cost-of-living city like San Francisco may spend 50% of their income just on housing. In that, using this budget would be a bad fit because all their ratios would be off.
If the thought of using a complicated budget overwhelms you, this system may be a good fit for you. You can still use a spreadsheet or app like Mint or Tiller with this budget. You’ll just have to make three overarching categories.
The only hang up when creating this kind of budget is deciding which expense goes into which category. For example, do car payments count as a need or want? Is eating out a need or a want? This will depend on your own personal preferences. Try to be honest and not let yourself off the hook.
The good news is that you won’t have to worry about how to split categories if you go to Target and buy groceries and toiletries. It can all go into the needs category. This is why people love the 50/30/20 budget – once you have it set up, it only takes minutes to categorize.
Use the 50/30/20 budget if you’re new to budgeting. If you like it, you can consider a more sophisticated system. But if you don’t want to make budgeting more complicated, then this is fine to use for the long-term.