50/30/20 Budgeting Rule: How To Use It [Free Calculator & Template]

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If you're looking for a simple and effective way to manage your household budget, the 50/30/20 rule could be exactly what you need. This blog post has a step-by-step guide to using this common approach to money management, plus a free template that you can use to create your own budget. Whether you're a household manager trying to stay within a tight budget or a single professional looking to save more money each month, this budgeting method can help you achieve your financial goals.

What Is The 50/30/20 Rule Of Money?

The 50/30/20 rule of money is a simple budgeting approach that divides your after-tax income into only three major categories: needs (50%), wants (30%), and savings (20%). These spending categories can be further broken down as you improve your budgeting skills. (See my article about 121 budget categories to inspire your budget.) The idea behind the rule is to help you prioritize where your hard-earned money should be going.

Examples Of Needs

Your financial needs include all of your basic living expenses: food, shelter, and transportation. When you create a budget, 50% of your monthly after-tax income should go toward necessities like rent, groceries, car payments, health insurance premiums, and any other basic needs such as a cell phone plan.

Examples Of Wants

While your needs are essential to sustain your life, wants make life more enjoyable. This category includes things like dining out, entertainment, streaming services, cable TV, gym memberships, hobbies, and vacations. The 50/30/20 rule recommends allocating 30% of your after-tax income to these wants.

Examples Of Savings

Savings is the neglected part of most people's budgets. The 50/30/20 rule suggests allocating 20% of your after-tax income to savings goals. This includes things like, an emergency fund, health care deductibles, a down payment, retirement contributions (such as a 401k retirement plan and individual retirement account (IRA)), other investments, and other financial goals. It's important to remember that if you don't save money for the future, you won't have any money when you need it the most.

What About Debt Payments?

There is some debate as to which of the three categories you should use to budget for debt payments. Many people say that you should allocate 20% of your take home pay toward savings and debt. In my opinion, debt repayment belongs in the needs category, because you need to make payments on existing debt or bad things can happen. It's also reasonable to split debt repayment between the three spending categories. For example, you could include minimum credit card debt repayment amounts in the needs category and extra payments in the wants category.

How To Budget Your Money With The 50/30/20 Rule

The 50/30/20 budget is more of a guideline than a full budgeting system. It can be a great tool for analyzing your spending habits and giving you a reality check about your monthly expenses. You can apply the 50/30/20 budget to several budgeting methods, including the envelope method (paper or digital). It works best when you have a steady paycheck, but you can also apply it if you have irregular income.

Calculate Your Monthly After Tax Income

The first step is to calculate your monthly after-tax income, also known as take home pay. To do this, you'll need to account for taxes, deductions, and other withholding from your paycheck. Once you have figured out what's left after taxes, that will be the total amount of money you have available each month.

Divide Your Monthly Income Into Three Categories

If your monthly income is $3,000, that means that you have $1,500 for your needs, $900 for your wants, and $600 for savings.

The 50/30/20 Rule VS. Other Budgeting Methods

The 50/30/20 budgeting rule is a great place to start as you think about how to allocate your take home income. But it falls short for most people when they try to apply it for several reasons. The biggest issue is that it doesn't reflect reality for most people. Additionally, most people need to budget for more than three main categories, so the 50/30/20 budget may not be detailed enough. Another reason the 50/30/20 budget is hard to follow is the lack of flexibility. Some people experience stress when they can't cover debt payments within 50% of their needs spending or when income and spend vary significantly month to month.

If you want to use a 50/30/20 budget style, you should consider combining it with a more robust budgeting method such as the YNAB method combined with the YNAB app or the cash envelope system. Which can provide you a much more detailed look into your spending habits and help you manage your finances in a much more flexible way.


Why Is The 50/30/20 Rule A Good Rule To Follow When Creating A Budget?

The 50/30/20 rule is a good rule to follow when creating a budget because it introduces you to the practice of prioritizing your spending. It emphasizes the need to cover your immediate obligations without neglecting future needs like retirement while allowing you to spend and save for fun things you want in the meantime. In short, it provides a practical, balanced approach for your budget.

What Is The 50/30/20 Rule For Bi-Weekly Pay?

Biweekly pay can be a challenge for people who want to budget the same amount of money every month because some months have an extra paycheck. This challenge can be overcome by budgeting only the money that you have instead of attempting to forecast how much money you will receive each month.

Does 50/30/20 Work For Everyone?

50/30/20 does not work for everyone. Some people's needs exceed 50% of their income, especially if they have debt, if their employer does not offer health insurance, if they have expensive rent, or if they have low income. Some people want to spend more on wants and some people want to spend more on saving. Evaluation your own income and spending priorities to determine a spending plan that works for you.

How Do You Make A 50/30/20 Budget Spreadsheet?

You can make your own or you can use my 50/30/20 budget calculator for free.

Is The 50/30/20 Method A Good Ultimate Lifetime Money Plan?

The answer depends on you and your individual priorities. No financial rule of thumb should be applied as a hard and fast rule. If saving money and seeing money in your bank account is more important to you, you may want more robust emergency funds. If debt repayment is your priority right now, you will want to pay more for debt than for wants. If your needs make up more than half of your take home income, you will end up saving less while paying more for your needs.

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