Better Budgeting: The 50/30/20 Rule

Budgeting

Like most things in life, when it comes to budgeting there is no such thing as one-size-fits-all. On the upside, no matter what your financial situation, budget or goals, there is a budget that will work for you. We’re continuing our budgeting blog series by sharing some insight on one tried-and-true system: The 50/30/20 Rule. Read on to learn what it is, how it functions and how make it work for you. Break out that spreadsheet and let’s get back to better budgeting.

Who is This Budget Good For?

This budget works best for people who have a steady income and bring in the same amount of money each month. If your income relies on tips or commissions in varying amounts, you may find it hard to stay true to the 50/30/20 percentages. If you still want to give the 50/30/20 plan a try, be sure to be conservative with your income estimates. In other words, plan as though you’re going to have a slow tip week or smaller commission check so you’re planning based on your tightest potential budget.

The 50/30/20 budget is also a great choice for those who have good self-control over their spending. If you tend to spend a little more than you can afford every month, you may want to wait for our next budget breakdown in which we’ll be breaking down the “Every Dollar Has a Job” budget, which might work better for you.

Meet the 50/30/20 Budget

The 50/30/20 rule is pretty simple. You dedicate 50 percent of your after-tax income to your monthly needs. These expenditures include things like housing, car payments, daycare payments, health insurance, groceries and any minimum payments on loans.Thirty percent of your income is allocated to your wants. This bucket includes things like shopping, streaming services, dining out and other nice-to-haves like a gym membership, luxury lattes and even vacations.

The last 20 percent of your income goes toward savings and paying down debt. Anything beyond the minimum payment on your loans comes out of this 20 percent. As for savings, it’s best to create a separate savings account that you don’t touch. Work with your employer to automatically defer a set amount each month into your account. It’s easier to save money when you don’t have to give it away each month. By automatically deferring your savings before you have it in your hands, you’ll be more likely to let it do its thing building up in your savings account.

Using Your Spreadsheet
Remember that handy spreadsheet? Break it out and let’s get started. Review what you have in
the “Needs” and “Wants” columns to make sure that everything looks accurate. It might help to grab a piece of scratch paper to jot down some notes as we go.

Multiply Your Paycheck by 0.5
This is the amount you should be spending on your needs. Compare this to the amount you have listed in the “Needs” column. Is your needs amount higher than your calculation? Make a note. We’ll come back to this and reassess what can be cut here to save money and get closer to your goal. If you haven’t gone over, great! It’s always good to be under budget. If you’re also under budget on your wants, you’re in great shape to reach your savings goal and pay off any debt.

If you are over, don’t panic. That’s exactly why we’re doing this – to get an honest understanding of where your money is going and how you can take control and set yourself up for success. Take a look at everything you have listed. Are there any reasonable ways for you to cut back? For example, if your lease is expiring soon it might make sense to look for more affordable housing or consider taking on a roommate to split rent. If your phone bill seems a little pricey, try shopping around for a new contract. If your car payment feels too steep, think about downsizing to something a little more economical or refinancing. Even small changes can have a big impact.

Multiply Your Paycheck by 0.3
This calculation is the most you should be spending on those nice-to-haves each month. Compare it to your “Wants” amount. If you’re not overspending on wants, awesome job!

If you find you’re not overspending on your wants but you are overspending on your needs, that’s ok for a little while. Sometimes, we all need to cut back on the things we want to make more room in our budget for the things we need. If you keep going over on both your needs and wants, it might be time to make some tough decisions. Consider which wants you can eliminate completely and which ones you can cut back on. Can you pack a lunch at home instead of eating lunch out during the work week? Switch to a cheaper internet provider? Take some time to do a little investigating. You can always look to your local college or library’s website for free online resources. (And hey, we’ve got a few too.)

Multiply Your Paycheck by 0.2
This is how much you should be allocating toward saving and paying off debt. Remember that minimum debt payments are considered a “need,” and paying anything more than the minimum would come from this 20 percent allocation.

We know it’s tempting to gloss over this category and use that extra 20 percent on needs or wants. If you find you’re dipping into this money often, consider setting it aside first to make sure you’re using it properly. Remember, paying more toward your debt reduces your monthly payments, giving you
more flexibility in the future.

Staying True to Your Budget

Now that you’re on your way to becoming a 50/30/20 expert, you might be wondering how to maintain it. After you make the necessary adjustments to your spending, the key is checking in with yourself each month. Don’t be afraid to ask hard questions: Am I adhering to these numbers? Do I need to make any adjustments? Have I had any life events that might change any of my numbers? If you find yourself following the plan every month, great job! If you don’t pick up your new spending routine right away, that’s ok. It takes time to adopt a new habit. Just be sure you’re being honest with yourself along the way. And if you decide that this budget isn’t for you, there are others out there. Keep an eye out for our “Give Every Dollar a Job” budget post coming soon.

Looking for more budgeting advice? We’ve got you covered. Check out some of our other financial help blogs.