How to Use the 50/30/20 Budgeting Rule

December 13, 2022

Let’s be honest, talking about money can be uncomfortable. But it’s also incredibly important. If you're feeling stressed about your finances, you’re not alone. A lot of people struggle to manage their money effectively. That’s where the 50/30/20 budgeting rule comes in – and it's surprisingly straightforward.

What is the 50/30/20 Rule?

Developed by Jen Schmidt, this rule is a simple way to allocate your income into three categories:

50% Needs: This covers essential expenses – things you absolutely need to live. Think rent or mortgage, utilities (electricity, water, internet), groceries, transportation (car payments, gas, public transport), health insurance, and minimum debt payments. These are the things you absolutely cannot live without.
30% Wants: This category is for everything that’s nice to have, but not essential. It's your discretionary spending. This includes things like eating out, entertainment (movies, concerts, streaming services), hobbies, new clothes, gadgets, and subscriptions you might enjoy.
20% Savings & Debt Repayment: This is where you prioritize your future and take control of your debt. This 20% should be split between building an emergency fund, saving for retirement, and paying down any high-interest debt (credit cards, personal loans).

How to Implement the 50/30/20 Rule:

Calculate Your Net Income: Figure out how much money you actually bring home after taxes and other deductions.
Calculate Your Percentages: Multiply your net income by 0.50, 0.30, and 0.20 to determine how much you should allocate to each category.
Track Your Spending: This is crucial. Use a budgeting app, spreadsheet, or even a notebook to track where your money is going. There are tons of great apps like YNAB (You Need A Budget), Mint, and EveryDollar that can help.
Adjust as Needed: The 50/30/20 rule is a guideline, not a rigid law. If you’re finding you consistently spend more than 30% on wants, you might need to cut back. Similarly, if you’re struggling to save 20%, you might need to increase your income or find ways to reduce your ‘wants’ even further.

Example:

Let's say your net monthly income is $3,000:

Needs: $1,500 (50%)
Wants: $900 (30%)
Savings & Debt: $600 (20%)

Benefits of the 50/30/20 Rule:

Simplicity: It’s incredibly easy to understand and implement.
Flexibility: You can adjust the percentages to fit your individual circumstances.
Focus on Priorities: It encourages you to prioritize your needs and savings goals.

Resources:

Ready to take control of your finances? Start tracking your spending and see how the 50/30/20 rule can help you achieve your financial goals!