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Breaking down the 50/30/20 rule: Is it right for you?

·3 min read

If you're new to budgeting, spreadsheets and pivot tables can be an overwhelming place to start. Luckily, these aren’t the only ways to build a budget that can help you make confident financial decisions.  

Before diving into the budgeting deep end, start with a simpler approach: a 50/30/20 plan. This method is easy to set up and maintain, helping you to achieve your financial goals. 

Read more: How to use Ally Bank’s buckets to simplify your spending and saving 

What is the 50/30/20 budget rule? 

A 50/30/20 budget (sometimes called the 50/30/20 rule) divides all your expenses into three categories: needs, wants and savings/debt. Here’s what divvying up your after-tax monthly income according to the 50/30/20 rule looks like: 

  • 50% goes to needs (e.g., housing, groceries, utilities and child care) 

  • 30% goes to wants (e.g., entertainment, dining out and clothing) 

  • 20% goes to savings and debt repayment (e.g. emergency fund and retirement accounts)  

This approach to budgeting is perfect for those who are newer to personal finance because it's easy to understand and follow (no pivot table required). 

How to implement the 50/30/20 budget rule 

The only thing that really matters when implementing the 50/30/20 budget rule is properly categorizing your spending beforehand using these four steps: 

  1. Calculate your after-tax income 

  2. Allocate 50% to needs 

  3. Dedicate 30% to wants 

  4. Save 20% for financial goals 

As you begin to track your expenses, it’s likely you'll notice if you're adhering to your guidelines or if adjustments are necessary. Where is the bulk of your money going? Are you able to save or are you splurging on takeout every week? This system allows you to quickly spot specific problem areas and adjust accordingly. 

Benefits of the 50/30/20 budget  

The 50/30/20 rule promotes balanced spending, making it easy to manage finances, prioritize saving and avoid overspending on non-essential items. This simple budgeting method is considered flexible because it can adapt to different income levels and financial goals.  

Challenges of the 50/30/20 budget 

No budgeting method is perfect, so consider the challenges of this system before committing to it:   

  • High living expenses: If you live in an area with a high cost of living, it can be difficult to allocate only 50% of your income to needs like housing and food.  

  • Variable income: For freelancers, entrepreneurs or anyone whose salary is not set at a consistent amount each pay period, this method can be hard to stick to.  

  • Managing existing debt: This budget might not be right for those with substantial financial debt since it doesn’t explicitly address the necessary steps to pay it off. 

Tips for success with the 50/30/20 budget 

To help the 50/30/20 budgeting method work for you:    

  • Adjust your budget over time: This isn’t a set-it-and-forget-it system. If your income changes or unexpected expenses come up, you might have to reassess how you allocate your budget.  

  • Maintain consistency and motivation: Budgeting isn’t the most exciting thing in the world, but it is important to stick with it to actually see results. And once those savings start adding up, you’ll be more motivated to continue.  

  • Automate your budget: With Ally Bank’s smart savings tools, you can set up recurring transfers to easily maintain the 50/30/20 division of your paycheck.   

Is the 50/30/20 budget right for you? 

That depends on your individual income, living expenses and financial goals. This method could be right for you if you’re looking for:    

  • A simple framework: The basic structure makes it easy to understand and implement. 

  • A balanced approach: The rule encourages allocation to both essential and discretionary costs while still prioritizing saving.    

But if you have high living costs, trouble with debt management or are working toward specific financial goals, this exact formula might not be the right system for you. The good news is, there are other budgeting strategies that could work for you. 

Build your budget skills 

Introducing new financial habits into your routine can be daunting, but practice makes perfect. Once you've mastered the 50/30/20 budgeting method, you might decide to start using a more complicated system — or not. The beauty of this budgeting philosophy is that it allows for detailed analysis but doesn't require it for you — and your spending — to stay on track. 

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