How to Use the 50/30/20 Budgeting Rule

June 21, 2022

Are you staring at your bank account and feeling a little…lost? Do you know where all your money is going, but you're not sure if it's actually working for you? Budgeting can feel complicated, but it doesn’t have to be. I've found a surprisingly straightforward method that’s helped me (and countless others!) take control of their finances: the 50/30/20 rule.

What is the 50/30/20 Rule?

Developed by Ramsey Solutions, this rule is a fantastic starting point for creating a budget. It’s based on allocating your after-tax income into three main categories:

50% - Needs: This covers the essentials – things you absolutely need to survive and function. This includes:
- Housing (rent or mortgage)
- Utilities (electricity, water, gas)
- Groceries
- Transportation (car payments, gas, public transit)
- Healthcare
- Minimum debt payments (student loans, car loans)
30% - Wants: These are the things you enjoy but could technically live without. They add value to your life, but aren't crucial. Examples include:
- Dining out
- Entertainment (movies, concerts, streaming services)
- Hobbies
- New clothes
- Travel
20% - Savings & Debt Repayment: This is arguably the most important category. It’s dedicated to building your financial future. This includes:
- Emergency fund (3-6 months of living expenses)
- Retirement savings (401k, IRA)
- Paying down high-interest debt beyond the minimum
- Investing

How to Implement the 50/30/20 Rule:

Calculate Your After-Tax Income: Figure out how much money you actually have after taxes and other deductions are taken out of your paycheck.
Track Your Spending: For at least a month, meticulously track everything you spend. You can use a budgeting app, a spreadsheet, or even just a notebook. This will give you a realistic picture of your current spending habits.
Categorize Your Expenses: Once you’ve tracked your spending, sort it into the 50/30/20 categories.
Adjust as Needed: The percentages are a guideline, not a rigid rule. If you live in a high-cost area and 50% of your income goes to housing, you might need to adjust the "Wants" category.
Review Regularly: Your financial situation will change over time. Review your budget regularly – at least quarterly – and make adjustments as necessary.

Is the 50/30/20 Rule Right for You?

The beauty of this rule is its simplicity. It’s a fantastic starting point for anyone who's new to budgeting. While it's not a one-size-fits-all solution, it provides a solid framework for taking control of your money.

Resources:

Ramsey Solutions: https://www.ramseysolutions.com/ (Explore their budgeting tools and resources)

Would you like me to delve deeper into a specific aspect of budgeting, such as building an emergency fund or tackling debt?