How to Budget with the 50/30/20 Rule
If you’re someone who just doesn’t have time for crazy budgeting spreadsheets and over the top money management techniques, you’re going to love the 50/30/20 rule.
Because it’s simple.
It’s basically the perfect budget for beginners and people who hate budgeting.
What is the 50/30/20 Rule of Thumb?
The 50/30/20 rule is a money management/budgeting technique that helps you break down your income into specific categories. This makes it easy for you to know where your money should be going each month.
The reason this rule is so popular is that it’s so easy to understand , unlike some other budgeting methods which can seem complicated and overwhelming at first.
How the 50/30/20 Rule Works
50% of Your Income Covers Your Needs
The needs category includes things like rent, groceries, utilities, etc – things you couldn’t live without.
According to the 50/30/20 rule, the cost of your needs should never exceed 50% of your take-home pay.
If the cost of your needs does exceed 50% of your income, you’ll either need to look into your budget and make cuts or you’ll need to increase your income.
30% of Your Income Covers Your Wants
Wants are things you’d rather not live without. They aren’t necessities, but your quality of living wouldn’t be the same without them.
This includes things like dining out, hobbies, cable, subscriptions, etc.
Now, although the rule states you can spend 30% of your income in this category, it doesn’t mean you have to . It also doesn’t mean that you should.
If you’re in a lot of debt, you should be trying to pay it off as quickly as possible. That might mean spending less than 30% of your income on wants.
20% of Your Income Goes Towards Savings
Savings includes things like investments, retirement contributions, paying off debt, etc.
It doesn’t include things like saving for a vacation or a fun toy, that would be a want.
Now, although this category is the smallest percentage, it’s one of the most important. Your goal should be to save more than 20% of your income if it’s possible.
Benefits of the 50/30/20 Budget
- Simplicity – The 50/30/20 budget doesn’t require any complicated spreadsheets or big-time commitments. It’s simple to set up and easy to maintain.
- Flexibility – The 50/30/20 budget can really work for anyone, and it can be adjusted to suit any kind of lifestyle.
- It works – If you implement the 50/30/20 rule properly it will help you spend less, save more, and reach your financial goals faster
How to Implement the 50/30/20 Rule
Step 1: Figure out Your Take-Home Pay
The first step to using the 50/30/20 rule is to figure out your take-home pay, or after-tax income. This is the money that you receive after you’ve paid all your taxes.
If you’re an employee you can figure out your after-tax income by looking at your paystubs.
If you’re self-employed or your income isn’t super predictable, you’re going to have to estimate a little bit.
Step 2: Pay Yourself First
Although the 50/30/20 rule ends with the 20% savings, we want to start with it .
Why? Because it’s a basic personal finance rule that you should always pay yourself first .
So, figure out what 20% of your take-home pay is and put it into something that will benefit you in the future . I recommend setting up an auto-deposit with WealthSimple and just allowing your savings to be invested automatically. This way, your dollars will be working for you, and you won’t even have to think about it.
Note: 20% is the absolute minimum that you should be putting into this category. It should be your goal to put more than 20% of your take-home pay into your savings each month.
Step 3 (optional): Download a Spending Tracker
This is an optional step but it’s one that I couldn’t live without, and it will help you with the upcoming steps.
A spending tracker is just a piece of software that you hook up to your bank account(s) and it tracks your spending automatically . The good ones will even categorize your spending.
If you’re in the US, you’re lucky because you have access to Personal Capital , which is arguably the best free personal finance app.
If you’re in Canada like me, you won’t have access to Personal Capital so I recommend using Mint. It’s free, it handles spending tracking really well, and it allows you to do some other stuff like budgets and bill reminders, too.
As a third option, you can also check out Trim . Trim can negotiate bills for you, track subscriptions, track spending, send you reminders to pay bills, and a lot more (check out my Trim Review here). I use Trim and Mint together and it’s a great combo.
Step 4: Limit 50% of Your Income for NEEDS
Take that number you figured out in step 1 and cut it in half. That’s how much you have to spend on your needs.
In order to see if you’re actually meeting this requirement, you need to figure out how much you’re actually spending on your needs.
So, add up the cost of all the expenses you have that fit into this category (this is where the spending tracker comes in handy). Needs include things like:
If you can’t live without it, it’s a need. (Yes, you can live without Netflix)
If you’re currently spending over 50% of your income on your needs, think about areas you can make changes in your budget:
- Groceries – Eating is definitely a necessity but there are so many easy ways to save money on groceries.
- Housing – It’s hard to find savings here but there are some options. Get a roommate or rent your spare room on Airbnb to save money on rent.
- Transportation – There are tons of ways to lower your transportation costs. Carpool, take public transit or drive for Uber/Lyft while you’re on your way to work.
- Phone – Check your phone bill and see if you’re spending more than you need to. If you want a cheaper phone plan check out Mint Mobile (their plans start at $15/month).
- Find more ways to save money.