Maybe you’re looking for a simple method to help you begin your budgeting journey, or maybe you’re a budgeting pro who wants more ways to save smartly. Either way, there’s a good chance that understanding the 50-30-20 budgeting framework could help you reach your financial goals sooner.
The 50-30-20 budget follows a simple rule: put 50% of your money toward needs, use 30% of your money to cover wants, and put 20% of your money into savings.
Keep in mind that the 50-30-20 budgeting framework is based on after-tax income, so the first step is knowing your net income for the given budgeting period. It’s usually easiest to budget one month at a time, so start there. Some people literally divide their money into three separate accounts with three separate debit or credit cards, while others track expenses and deduct funds from each category as the spending occurs.
Another way to implement the 50-30-20 system is to simply observe how your current spending stacks up against the formula. Again, start with your net earnings per month, then add up your typical spending on needs, wants and savings. For needs, write down how much you typically spend on rent or mortgage, utility payments, car payments, minimum debt payments, groceries, and any other bills which must be paid every month. Next, add up your typical monthly spend on “wants” (such as entertainment subscriptions, drive-through coffees, eating out, vacations and so on). Finally, write down what you typically put aside in savings, including retirement accounts, each month.
If your spending doesn’t fit the 50-30-20 framework—don’t worry! The whole point of using the 50-30-20 budget is to help you understand where your money is going and make adjustments to fit your financial goals.
When doing the 50-30-20 breakdown, the first thing many people notice is that their savings are below 20% while their “wants” are above 30%. If this describes your financial situation, take a long hard look at monthly “want” spending to determine if any funds can be put toward savings instead. Stopping subscription creep and avoiding lifestyle inflation are both excellent places to start!
Another idea to increase savings and hit that 20% goal is to open an Individual Retirement Account (IRA) or a Roth IRA. Having a dedicated account for retirement savings is great motivation to stash more cash, plus with an IRA you’ll be saving for retirement in a tax-advantaged way.
At a moment in which costs are rising, some households may find that it’s impossible to cover all needs—including rent, transportation, food and debt payments—with just 50% of their after-tax income. If this describes your financial situation, adjust the 50-30-20 ratio so it makes better sense for your current expenses. You may find that aiming for a 60-20-10 budget works best.
While not all financial challenges can be overcome via personal spending changes, you may be able to reduce some of your “needs” expenses by altering certain financial habits. To reduce monthly debt payments (i.e. from high-income credit cards), consider paying off more debt all at once to stop future interest once and for all. Similarly, you may be able to save on energy bills and home maintenance costs by investing in home improvement projects.
Many people find that the 50-30-20 budgeting system gives them just enough structure and clarity to spend less on unnecessary expenses, and save more for the future. The 50-30-20 rule may be especially useful to people who are unhappy with their current spending habits, but unsure how they should be adjusted.
At the same time, the 50-30-20 framework won’t work for everyone. People working to pay off significant amounts of high-interest debt (such as credit card or payday loan debt) are typically advised to prioritize debt payments over both wants and savings; and wherever possible, they should aim to pay off that debt as quickly as possible, rather than making only the minimum payments. The 50-30-20 formula may also be difficult to adhere to for people facing rising housing costs. Still, by adjusting the framework to match your unique financial situation, you may be able to find a workable formula and a new way to try budgeting!