What Is the 50-20-30 Budget Rule?

February 19, 2021 By: Cox Search

For anyone seeking a simple way to set up a budget and prioritize savings, the 50-20-30 formula is a great place to start. This rule of thumb can be used by any consumer, regardless of income level, and offers straightforward guidance to help you live within your means.

This calculation is light on hard math, which is great if you’re someone who turns pale at the prospect of working with numbers. Here’s everything you need to know about the 50-20-30 rule, and how you can use it to improve your budgeting and long-term financial planning.

What is the 50-20-30 Budget Rule?

This basic budgeting rule makes it easy to allocate and plan for your monthly expenses as a percentage of income. The formula helps structure your spending and saving by dividing up your take-home income in the following ways:

• 50 percent of your take-home income should be put toward “needs,” including rent or mortgage, utilities, food, childcare, and other essential services.
• 20 percent of your income should be put toward savings goals, such as building up an emergency fund, a down payment on a home, or investing in your retirement.
• The remaining 30 percent of your income can be dedicated to “wants,” such as eating out, entertainment, shopping, and travel.

This budgeting rule suits any level of income, offering a simple template to help you live within your means, enjoy your hard-earned money, and save toward future goals.

How Much of My Paycheck Should I Save?

Saving can be a challenge at any point in life—especially when you’re just entering the workforce. According to the 50-20-30 plan, the ideal budget will take at least 20 percent of your paycheck and deposit that into savings.

Depending on your financial goals, the specific type of account where these savings are placed may vary. Early on, it’s often helpful to place money into a savings account that can be used to provide a financial buffer in the event of unexpected expenses or loss of income. Once that fund is established, you may want to contribute to investment accounts, including retirement accounts offered through your employer, to save toward longer-term goals—or you may want to set aside money for major upcoming purchases, such as a wedding, car, home, or other financial goals.

If you’re struggling to dedicate 20 percent of your income to saving, start with what you can, and see if you can increase that amount over time. Even if you can’t hit the 20 percent goal right away, every bit of saving helps.

How to Make a Household Budget

The 50-20-30 rule makes it easy to divide your paycheck into broad categories, but to make this budget percentage breakdown work, you need to create a workable budget you can live off.

To start, dedicate 20 percent of your budget to savings—which leaves 80 percent of your income that can be divided up for various expenses. Identify the “needs” categories of your budget: Rent/mortgage, utilities, phone bill, student loan payments, groceries, insurance, etc. Add these up: Do they equal 50 percent or less of your available income?

If they’re over your limit, you may want to find ways to reduce these costs. Maybe you need a roommate to afford where you live—or maybe you can use coupons to slim down your grocery budget.

With the remaining 30 percent, determine how and where you want to spend your money. Do you love restaurants? Maybe eating out should get a large share. Or maybe you love concerts and want to attend at least one every week. By contrast, maybe you want to spend sparingly on a day-to-day basis and put that money toward more vacations. The choice is yours—just make sure you stay within your means.

Savvy Methods of Saving Money

Looking for creative ways to stretch your dollars and increase your savings power? Here are some great tips to get started:

• Use credit cards sparingly, if at all. If you find yourself spending more than you can afford every month, reduce credit card spending and/or consider making purchases with a debit card or cash. This will help you be mindful of your spending and stick within your means.
• Take an eco-friendly approach to managing your thermostat. Settling for a higher indoor temp during hot weather, and colder temps during the frigid months, can reduce your utilities bills all year.
• See if you qualify for a lower student loan payment. Certain repayment plans, such as income-based repayment, offer lower monthly payments that can reduce financial strain.
• Avoid impulse purchases. Quick spending decisions can lead to buyer’s remorse and take a big bite out of your monthly budget.
• Use automatic contributions to fund savings accounts. Automatic payments turn saving into a monthly expense and save you from the temptation of spending money you should be tucking away.
• Don’t overlook debt repayment. High-interest debt can be a drain on your finances. If you’re saddled with debt, make a plan to pay off loans and other debt as a means of increasing your financial freedom in the future.

As you start managing money on your own, the task of deciding how to budget money is something you will likely figure out over time. Once your 50-20-30 rule is in place, pay attention to your spending habits and look for ways to improve your money management. If you end up with extra money at the end of the month, consider adding a little extra to your savings, and moving yourself closer to those bigger financial goals.