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The 50/30/20 Rule Demystified

June 03, 2021 · 6 minute read

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The 50/30/20 Rule Demystified

If you like the idea of setting up a budget, but worry the process will be too complicated, or recoil at the thought of having to put every random item you buy at Target into a budgeting category, don’t despair.

There’s a simpler way to get a handle on your spending and start saving more–it’s called the 50/30/20 budget.

The 50/30/20 budget or “rule” is a budgeting framework that can be relatively easy to create and implement, and is one potential way to help keep your finances on track and help you work towards your goals.

The 50/30/20 numbers refer to percentages of your income that you would allocate to three main categories–”needs” (essentials), “wants” (nonessentials), and saving (financial goals), respectively.

The primary goal of the 50/30/20 rule is to learn to prioritize saving money by making it a key part of your spending plan.

Everyone’s financial needs and goals are different, however. And, while these percentages can be a great starting point, you may find that you need to tweak these exact numbers to better suit your needs and current financial situation.

Read on to learn how the 50/30/20 rule works, along with tips for implementing this easy-to-follow budgeting method.

How the 50/30/20 Rule Works

In the 50/30/20 budget, you allocate your take-home (or after-tax) income into three main categories or buckets according to percentages. Here’s the breakdown:

50% to “Needs”

These are things you cannot live without and the bills you cannot avoid paying. This includes rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities.

The “needs” category does not include items that are extras, such as Netflix, dining out, and clothing beyond what you need for work.

30% to “Wants”

Also known as personal, discretionary, or nonessential spending, these are the things you buy that you could technically live without. This includes dinner and movies out, a new handbag, tickets to concerts or sporting events, vacations, and the latest electronic gadget. Wants are all the little extras and upgrades you spend money on that make life more fun.

20% to Savings

This is the money you save for future financial goals. This includes adding money to an emergency fund, saving for a downpayment on a home, making IRA contributions, and extra payments to help pay off your loans sooner (minimum payments are part of the “needs” category).

Even though the budget is written as 50/30/20, the purpose of this system is to prioritize the saving–the 20%. (It may be more appropriately named the 20/50/30 budget.)

The idea is to make space for the 20% without laboring over the rest–because, really, the minutiae of where your fun money is going ($5 for a latte here, $10 for an appetizer there) isn’t super important if you’re saving enough to meet your financial goals.

If you aren’t saving 20% of your income right now, that’s okay. The process of setting up the 50/30/20 budget will help you find out where your money is going so that you can make adjustments. After completing your budget breakdown, you can address the areas where you’d like to cut back.

Benefits of the 50/30/20 Budget

The 50/30/20 rule may be a minimalist budget, but it can pack the same powerful benefits you would get with a more labor-intensive budget.

Some of the payoffs of setting up and following a 50/30/20 include:

•  Knowing where you stand. As the popular adage goes, “what gets measured gets improved.” It can be hard to start spending less and saving more if you aren’t clear on how much and where you are currently spending.

•  Identifying easy ways to cut back. As with any budgeting process, the 50/30/20 budget can reveal opportunities to cut back on spending. Simply going through the process–and seeing exactly where your money is going each month–can help to motivate you to make some relatively pain-free adjustments.

•  Reducing financial stress. While building a budget may seem like stress-inducing exercise, it can ultimately relieve a lot of financial worry by adding structure and clarity to your spending. Instead of angsting over every purchase, you’ll have built-in boundaries that allow you to spend freely within your budget.

•  Simplifying the budgeting process. By having fewer categories than a traditional monthly budget, the 50/30/20 rule of thumb can be simple to set up and to maintain. It can also be easy to track a 50/30/20 budget digitally.

•  Achieving your savings goals. By making saving a priority–and setting this money aside before you start spending–a 50/30/20 budget can help you work effectively towards your financial goals, whether that’s creating an emergency fund, making a downpayment on a home, or going on a great vacation.

Implementing the 50/30/20 Budget

Want to give the 50/30/20 budget a try? If you decide to go this route, or you’re just looking for some budgeting basics, here are some steps you can take to get started.

Gathering Your Financial Records

To get started with any kind of budget, it’s helpful to collect the last three months or so of bank and credit card statements, pay stubs, receipts, and bills.

Calculating Your Monthly Income

You can use your statements to figure out exactly how much money you are bringing in each month after taxes are taken out. You can think of after-tax dollars as the pot of money you have to siphon into the three budget categories each month.

Setting a Savings Target

You may want to begin with the most important category–the 20% (savings). Since the goal for this budget is to turn the 20% into a nonnegotiable part of the plan, you’d calculate 20% of your monthly after-tax income and set that figure aside for things like debt repayment, cash savings, retirement investing, and any other financial goals that you have.

Even if you don’t feel it’s realistic for you to put 20% into saving right now, you might run the exercise assuming that you will–you’ll be able to tinker with the numbers later.

Calculating Essential Monthly Expenses

Next, you may want to make a list of all of your monthly essential or fixed expenses, such as rent/mortgage, utilities, groceries, and insurance.

Currently, do essential items absorb more than 50% of your take-home income each month? If so, what percentage do they comprise? And, is there any way to reduce any of these monthly expenses?

Building a Hypothetical Budget

After adding up savings and essentials, what is left over is what can be allocated towards discretionary spending–the “wants.”.

It can be helpful to keep in mind that the 50/30/20 numbers are just a guideline. If the cost of living is high where you live, for example, it may not be feasible to keep essentials to 50% of your take-home income. In this case, you may need to reduce spending on wants. Or, you may decide that at this point you can’t quite afford to put 20% into savings.

Once you see your numbers in black and white, you can play with the percentages and come up with a workable plan for roughly how much you can spend on nonessentials, or fun, each month.

Putting Your Plan into Action

Now that you have a basic guideline of how much money you will put into savings each month and how much cash you can spend each month on wants, it’s time to give your budget a try.

You may want to plan on tracking your spending for two to three months to start. You can do this by saving receipts and logging expenses according to the three categories at the end of the day. Or, you could use a budgeting app that makes it easy to track and categorize expenses.

Making Some Tweaks

After tracking your spending for several months, you’ll probably have enough data to refine your original 50/30/20 budget. From there you can adjust the categories based on your actual spending, not just your projected spending.

You may also find that you need to adjust your spending. Discretionary spending is typically the easiest place to do some trimming.

You may decide you need to cook at home (rather than get takeout) a few more times a week, cancel a streaming service you rarely watch, or ditch the gym membership and work out at home.

it may also be possible to pair back some of your fixed monthly expenses. Reducing utility bills, transportation costs, and, if possible, rent, could free up more money for fun spending.

After making some adjustments, you can execute your new and improved budget. You may want to continue to track spending in a method that works best for you until spending according to your budget becomes second nature.

The Takeaway

The 50/30/20 rule of thumb is a set of easy guidelines for how to plan your budget. Using them, you allocate your monthly after-tax income to the three categories: 50% to “needs,” 30% to “wants,” and 20% to your financial goals.

Your percentages may need to be adjusted based on your personal circumstances and goals. But using this simple formula can be a good way to get a better handle on your finances, and to start working more effectively towards your goals.

You may find that technology can help make sticking to a budget simpler. SoFi Money®, for instance, is a cash management account that has features built directly into the app that help you track spending and set aside savings for specific goals.

Check out how SoFi Money can help you stick to your budget today.



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