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The 50/30/20 plan: Budgeting you can actually stick with

What we'll cover

  • What a 50/30/20 budget is

  • How to create a 50/30/20 budget

  • What makes a 50/30/20 budget better than a traditional budget

Budgeting is like exercise: we all understand its importance. But exercising consistently can be a struggle. And, like popular fitness programs like SoulCycle or Vinyasa Yoga, budgeting can also seem intimidating and complicated.

But it doesn’t have to be.

Beginners often jump right into the deep end, but it’s better to start with a more simplistic approach and focus on a wide overview of your financial habits.

This is where the 50/30/20 budgeting system shines. It’s easy to set up, easy to follow, and easy to maintain, helping you to achieve your financial goals. Here’s what you need to know to get started and answers to frequently asked questions about a 50/30/20 budget.

What exactly is a 50/30/20 budget?

A 50/30/20 budget (or 50/30/20 rule) is one that divides all your expenses into three categories: needs, wants, and savings/debt. Here’s the breakdown of how to divvy up your after-tax monthly income:

  • 50 percent goes to needs

  • 30 percent to wants

  • 20 percent to savings and debt repayment

A circle showing needs, wants and savings.

Living expenses like mortgage, groceries, or transit expenses (gas, metro pass) would be categorized as needs, while movie tickets and camping gear would be labeled wants. Retirement contributions and student loan payments would fall in the savings and debt category.

The biggest question most people have when creating a budget is whether they’re spending too much on an item. Rather than fretting about how much you spend on, say, gas or coffee, this system allows you to create a general spending structure without the need to delve into specifics.

Creating your own 50/30/20 budget

To get started, write down all your monthly expenses and categorize by wants, needs, or saving/debt payments. Add up the total of each category to see an initial breakdown of your spending habits. Ideally, you should land as close to 50/30/20 as possible.

If your spending in one category exceeds the recommended percentage, it’s time to get a little more specific. Are you spending too much money on rent, tipping your needs over the threshold? Are you barely saving 5 percent for retirement? Are you splurging on Uber Eats every week, which is causing your wants category to be all out of whack? Rather than forcing you to write a detailed budget from the ground up, this system allows you to target specific problem areas and adjust accordingly.

Is it a need or a want?

Some expenses, like concert tickets, streaming services, and sports events are obvious wants. Other things might be harder to distinguish.

Graphic with the words “needs vs. wants”.

If you buy groceries at the supermarket, that’s a need. But if you go to a restaurant or have a Blue Apron subscription, is that a want or a need? Only you can decide if your weekly sushi outing is a need or a want. Try to be honest with yourself. If you categorize too many wants as needs, you may find yourself struggling to find the money for things like rent and utilities.

Help! My savings/debt payments add up to more than 20 percent.

Even if you’re being financially responsible, it’s possible for your debt/saving category to exceed 20 percent. Perhaps you’re saving more than 20 percent of your after-tax monthly income for retirement, an emergency fund, and other goals. Or maybe your outstanding debt requires payments that account for more than 20 percent.

If you’re being a super saver and socking away more than 20 percent, don’t worry about your budget not adhering to the target. But if your debt is more than 20 percent, you should examine where it’s coming from. Are you still paying back significant student loan debt? Is there a revolving credit card balance you can’t seem to pay off? Are you struggling to balance several loan payments?

Take some time to review your debt and see if you can repay it faster than expected. (Maybe you can reallocate some of the money you spend on wants to debt repayment.) You can also try to refinance the debt to get a lower interest rate. Debt consolidation might also be an option for you.

What makes a 50/30/20 budget better than a traditional budget?

Simply put: Having simple goals in place makes them easier to follow. You only have so much willpower in a given day, so it’s best to use a budgeting system that prioritizes big picture decision-making over meticulous tinkering. You don’t need to worry that you’re over your entertainment budget by $7.23 for the week or that you’re desperate for new socks but don’t have any funds remaining in your clothing budget. The no-frills 50/30/20 rule allows you to focus your mental energy elsewhere.

Setting up a 50/30/20 budget

You can set up this budgeting method a few different ways. You can use a spreadsheet, mobile app, or pen and paper. The only thing that really matters is making sure your spending has been properly categorized beforehand. As you begin to track your expenses, you’ll quickly notice if you’re adhering to your guidelines or if adjustments are necessary.

Do you count after or before tax income?

The starting figure you use should be the amount you make after taxes, otherwise known as your net income. To calculate that number, subtract everything that’s deducted from your gross income like federal, state, and local taxes; health insurance; and 401(k) contributions. Or, in most instances, simply look at the amount of your take-home pay.

A 50/30/20 budget is beginner-friendly.

A 50/30/20 budget is perfect for everyone because it’s easy to understand and follow.  It’s especially easy for a personal finance newbie to organize their budget by needs, wants, and debt/savings. And it takes very little time to decide if something is a need or want.

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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