How to Budget Using the 50/30/20 Rule

2024-10-05Last Updated: 2024-10-05

Managing your money can be overwhelming if you have no idea where to start. One of the simplest yet most powerful ways to manage your money is the 50/30/20 rule. This budgeting method gives you a clear framework to split your income into three categories: needs, wants and savings.

In this post, we’ll break down how to budget with the 50/30/20 rule. By following this rule, you can cover your essentials, indulge in some personal pleasures and save for future goals!

Understanding the 50/30/20 Rule

The 50/30/20 rule is a budgeting formula that splits your after tax income into three parts:

50% for Needs: The essential expenses you must pay to live and work.
30% for Wants: The non essential expenses that improve your life.
20% for Savings and Debt: Money for savings, investments and debt repayment.

The 50/30/20 Budgeting Guide

1. Calculate Your After – Tax Income

The first step in the 50/30/20 rule is to calculate your after-tax income. This is the money you take home after taxes and deductions. If you’re a salary earner, this will be your net pay. If you’re a freelancer or self employed, this will be your gross income minus your estimated tax payments. Knowing your real income means your budget is based on the money you actually have to spend.

2. 50% to Needs

Once you have your after-tax income, the next step is to allocate 50% of it to your needs. These are expenses that are necessary for living and working, including housing, utilities, groceries, transportation, insurance and minimum debt payments.

If your needs are more than 50% of your income, you may need to look for ways to reduce these expenses. This could mean finding more affordable housing, cutting back on utility usage or shopping smarter for groceries.

3. 30% to Wants

Next allocate 30% of your after-tax income to wants. Wants are non-essential expenses that improve your life but are not necessary for your basic living needs. These include dining out, entertainment, hobbies, shopping, travel and subscriptions.

This category is for personal indulgence and leisure activities which are important for a balanced life. Make sure to balance enjoying your money and staying within your budget. Tracking your spending in this category will help you from overspending and make sure your wants don’t infringe on your needs and savings goals.

4. 20% to Savings and Debt Repayment

The last step is to allocate 20% of your after-tax income to savings and debt repayment. This includes building an emergency fund, contributing to retirement savings, making investments and paying down debt.

Saving and investing is for future financial security and paying off debt is for financial freedom. Building an emergency fund is essential as it’s a financial buffer for unexpected expenses. Also, save for retirement and invest to grow your wealth over time.

5. Review and Adjust Your Budget

Budgeting is not a one-time task. You need to regularly review and adjust your budget to reflect changes in your income, expenses and financial goals. Life changes and your budget should change with it.

Use budgeting tools or apps to track your spending and make sure you’re following the 50/30/20 rule. Reviewing your budget will help you stay on track and make informed decisions.

50/30/20 Tips

Track your spending: Keep track of where your money is going so you can make better decisions.
Automate savings: Set up automatic transfers to your savings and investment accounts so it becomes a habit and you reach your goals faster.
Review regularly: Review your budget every now and then to adjust for changes in income or expenses.
Be realistic: Set realistic goals and be honest about your spending.

Final Words

The 50/30/20 rule is a way to take control of your money without feeling like you’re drowning. By splitting your income into needs, wants and savings, you can make sure you’re covering your basics, enjoying your life and saving for the future. It’s simple, flexible and helps you stay balanced with your finances.

Try it out and see how it makes you feel more in control and less stressed about money. Start today and take the first step towards a more secure financial future!

More Resources

Thank you for reading our guide to the 50/30/20 rule. To keep learning and developing your knowledge of budgeting, we highly recommend the additional resources below: