Using the 50/30/20 Rule to Create a Budget
If you’re someone who doesn’t have the patience for tracking your expenses in detailed categories (ex: housing, transportation, recreation and activities), the 50/30/20 budget might be for you!
What is a 50/30/20 Budget?
The 50/30/30 rule was popularized by the book All Your Worth: The Ultimate Lifetime Money Plan by Senator Elizabeth Warren. The 50/30/20 rule budget only requires you to track and divide your expenses into three main categories: needs, wants, and savings or debt. To create a 50/30/20 budget, you start with your net income, which is your take-home pay, the amount after taxes and deductions. Using your net income as your baseline, you divide your expenses into three categories: needs, wants, and savings.
Here’s an example of how a 50/30/20 budget might look:
If your monthly income is $4,000, then $2,000 (50 percent) would be set aside for needs. Another $1,200 would go toward wants, and the final $800 would go into savings.
50 / Needs
Your needs bucket is largest at 50 percent of your net income. This bucket covers necessities such as rent, utilities, renter’s insurance, groceries, health care expenses; at least the minimum payments on your debts; and the bare minimum of basic clothing and supplies for living.
30 / Wants
Your wants bucket is the second largest chunk at 30 percent of your net income. This bucket covers things like hobbies, entertainment, gifts, luxuries, etc. Expenses for things you don’t absolutely need but might be inconvenienced by being without (ex: your Netflix subscription), fall into your wants bucket.
20 / Savings
The remaining 20 percent will go into savings. Whether you are trying to pay off debt more quickly than required, saving for a new house, or just setting aside emergency funds, 20% of your net income should go into this bucket.
Is the 50/30/20 rule budget good for you?
Overall, the 50/30/20 rule can be a sound budgeting method for some people. But whether the system is right for you depends on your specific circumstances.
Having just three categories to track might help you focus on fine-tuning your finances instead of getting bogged down in the process of categorizing each individual expense. For others, the lack of structure could make it harder to find ways to improve their spending habits. Ultimately, you need to decide whether a budgeting system that’s less detailed or more highly detailed will be best for you, but if you are just starting with a formal budget, the 50/30/20 rule can be a great place to start.