Meeting your financial goals doesn’t happen without effort — and a big part of that effort includes deciding on and implementing an effective budget. Anyone who has wondered, “How can I save $10,000 in a year?” or “How can I make sure I have enough money left over each month for my bills?” should consider how the 50/30/20 budget can help.
Recently popularized by Sen. Elizabeth Warren, the 50/30/20 rule is based on directing 50% of your income toward necessities, 30% toward disposable income and 20% toward savings. Using this type of percentage-based budget can help you meet and even exceed your financial goals. Find out how the 50/30/20 budget works and whether it’s the best budgeting method for you.
- What Are the 3 Categories Included in a 50/30/20 Budget?
- How Do You Budget Your Money Under the 50/30/20 Rule?
- Who Is the 50/30/20 Budget Best For?
- Who Is the 50/30/20 Budget Worst For?
- How To Customize the 50/30/20 Budget
- Is the 50/30/20 Budget Right for You?
The three categories included in a 50/30/20 budget are needs, wants and savings. When using this budget, you divide your after-tax income between each of the three categories.
Needs include essential expenses like rent or mortgage, utilities and food, whereas wants include nonessential expenses like dining out, shopping and travel. And, of course, savings expenses include deposit accounts or retirement funds.
Find Out Why: This Expert Doesn’t Use the Popular 50/30/20 Budget Rule
Budgeting your money under the 50/30/20 rule is easy. The first thing to do is to determine your net income, which is the amount of pay you take home after taxes and deductions.
Next, divide your net pay into three categories. For example, here’s how you would divide a take-home pay of $4,000 after taxes:
- 50% toward needs: $4,000 x 0.50 = $2,000
- 30% toward wants: $4,000 x 0.30 = $1,200
- 20% toward savings: $4,000 x 0.20 = $800
Dividing Your Take Home Pay Between Categories
Here’s a more detailed explanation of what goes into each of the three 50/30/20 rule budgeting categories.
With a take-home income of $4,000, 50% would be $2,000. That means you would budget $2,000 each month toward your needs, such as mortgage, utilities, groceries and fuel.
For your wants — think movie tickets, new shoes, coffee drinks and the newest iPhone — you can allot 30% of your take-home earnings. So with a $4,000 net pay amount, you’ll have $1,200 in discretionary funds to use as you please.
When it comes to savings, many people are at a loss, asking questions like, “How much of your paycheck should you save?” When you follow the 50/30/20 rule, it’s easy: You save 20% of each paycheck, which can go toward various savings solutions you have set up.
You also might be wondering, “Does the 50/30/20 rule include a 401(k)?” which is a good question considering that 401(k) contributions are pretax and deducted automatically from your paycheck. The answer is yes. The 50/30/20 rule includes any type of savings you want to include, such as savings accounts, certificates of deposit, retirement accounts and emergency funds.
The 50/30/20 budget is best for people who have enough income left over to budget elsewhere after paying for their basic needs like rent and utilities. In the event you find yourself blowing your extra money each month by overspending on nonessentials like shopping trips, expensive dinners, the latest electronics and other luxury items, you might find that the 50/30/20 budget is a good solution. A percentage budget can help you better manage your money, live within your means and have enough money left over each month to put toward savings or extra debt payments.
People who can barely make ends meet with their current income or who are in between jobs won’t find that the 50/30/20 budget works very well. You need to have enough money left over to put toward the savings and spending categories. To use this budget successfully, you would need to work on increasing your monthly income so you can create room in your budget for wants and savings.
You can customize the budget to work for you even if you think the percentage categories — 50%, 30% and 20% — aren’t quite right for your financial lifestyle.
For example, supposing you need to allocate more of your budget toward needs, you could try 60%. Then, you could adjust your wants category to 20% and your savings category could stay at 20%. Or you can do any variation, such as 40/40/20 or 30/40/30 — whatever works for you.
Whether the 50/30/20 budget is right for you depends on whether you have income left over after you budget for your basic life necessities. As long as you do, this budget can help you meet your needs and savings goals, with money left over to spend as you like. Keep in mind that you can always tweak the percentages for the spending and savings categories to better meet your financial picture.
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This article has been updated with additional reporting since its original publication.