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How to Use the 50/30/20 Budgeting Rule

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How to Use the 50/30/20 Budgeting Rule

June 27, 2023

Let’s be honest, talking about money can be uncomfortable. But taking control of your finances doesn't have to be scary. If you’re feeling overwhelmed by bills, struggling to save, or just generally not sure where your money is going, the 50/30/20 budgeting rule might be exactly what you need. It’s a remarkably simple and surprisingly effective way to manage your money.

What Exactly Is the 50/30/20 Rule?

Developed by Jen Schmidt, this budgeting method divides your after-tax income into three categories:

  • 50% – Needs: This is the big one. These are your essential expenses – things you absolutely need to survive and function. Think:

    • Rent or Mortgage
    • Utilities (electricity, water, internet)
    • Groceries
    • Transportation (car payment, gas, public transport)
    • Health Insurance
    • Minimum Debt Payments
    • Childcare (if applicable)

  • 30% – Wants: This category covers your desires – things that make life enjoyable, but aren't strictly necessary. This is where you can be honest with yourself. Examples include:

    • Dining out
    • Entertainment (movies, concerts, streaming services)
    • Hobbies
    • New clothes (beyond what you need)
    • Gym memberships

  • 20% – Savings & Debt Repayment: This is crucial for your financial future. This money should be dedicated to:

    • Emergency fund (aim for 3-6 months of expenses)
    • Retirement savings (401k, IRA)
    • Paying down high-interest debt (credit cards, personal loans)
    • Saving for a specific goal (down payment on a house, vacation)

How to Implement the 50/30/20 Rule

  1. Calculate Your After-Tax Income: Figure out how much money you actually have available after taxes and other deductions.

  2. Track Your Spending: For a month or two, carefully track everything you spend. There are tons of apps and spreadsheets that can help with this (Mint, YNAB, Google Sheets). This will show you where your money is really going.

  3. Allocate Your Money: Based on your tracked spending, adjust the 50/30/20 percentages. It’s a guideline, not a rigid rule! If you live in an expensive city, your "needs" might be higher.

  4. Review and Adjust Regularly: Life changes! Your income may increase, or you might have new expenses. Make sure your budget still aligns with your goals.

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

This rule is great for beginners and anyone who wants a simplified approach to budgeting. It’s flexible and adaptable. Don’t get bogged down in complex spreadsheets – focus on the big picture.

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