Money comes in, money goes out…but how do you figure out how much of your income should be going to what? Having a strategy that balances different aspects of your financial life makes it a lot easier to build a budget you can stick to (while hitting your goals and paying down debts to boot).
The 50/30/20 rule is a handy approach to budgeting for your essentials, staying on top of your debt and savings game, and making sure you’ve got some cash for the fun stuff. Learn how it works, then walk through a simple five-step guide to making your 50/30/20 budget.
What is the 50/30/20 rule?
The 50/30/20 rule is an approach to budgeting that helps you split up your hard-earned cash among three categories: needs, wants, and debt/savings. You figure your total monthly take-home income, then carve it up as follows:
- 50% for “needs”—your bottom-line essentials for living
- 30% for “wants”—stuff you enjoy having in your life
- 20% for debt and savings—paying it down and building it up, respectively
How is a “want” different from a “need”?
A “need” is anything that you can’t live without. There are no rules for what counts as a need; we all have different absolute-must-haves in our lives. Common needs are food, housing, transportation, childcare, minimum debt payments, and medical costs—but those may or may not be your needs. For example, movement classes might be a fun extra for some people, but for others, they’re essential for managing chronic illness.
A “want,” on the other hand, is something you’d like to have, but you could do without if you really had to. Typical “wants” include things like entertainment, takeout, and treats like fancy coffee or a rad new bike. But wants—just like needs—are totally individual; ordering food, for instance, might be a need for you if you’re juggling full-time work and parenting.
Break down, mentally or on paper, what your needs and wants are before you get started. It’ll give you the opportunity to define what counts as a need for you and will help you prioritize (and avoid confusion) down the line.
How do you budget for debt and savings?
Choosing exactly how to split up that 20% between debt and savings also depends on your individual situation. If you’ve got high-interest debt, you might allocate more money to debt payments to knock down what you owe faster (and pay less interest over time). But if you’re paying low interest rates, you may benefit from putting more money toward saving up for your goals. You might prioritize building an emergency fund or saving for long-term plans like homeownership, retirement, or a new (or new-to-you) car—as well as fun stuff like that sweet kayak you’ve been dreaming about.
Is the 50/30/20 rule right for you?
The 50/30/20 rule is a solid budget strategy for a lot of folks, but no single approach works for everyone. Using the 50/30/20 rule might be a good fit for you if:
- You have predictable income
- You’re not laser-focused on saving or paying down debt
- The percentages make sense for your income (because let’s be real, not everyone can cover their essentials with 50% of their take-home pay)
If you have variable income, the 50/30/20 budget may not be the best fit for your budget—check out this variable income guide for some specific budgeting tips. And if you’re currently without income, here are ideas for budgeting with no (or) low income.
Budget tip: you don’t have to follow the 50/30/20 rule to the letter. Flex it to work for your life! For example, if your debt is really weighing on you, it might make sense to spend just 25% on wants so you can put 25% toward debt/savings—you’ll still be in the 50/30/20 rule ballpark. And if you have two earners in your family, this article suggests a clever variation for two-income households.
Ultimately, the best budgeting strategy is whatever brings you closer to your financial goals. If trying the 50/30/20 rule sounds good to you, grab a pen and paper! Go through the five steps below to sketch out a budget now in just a few minutes.
5 steps to budgeting with the 50/30/20 rule
1. Figure out your monthly take-home income
Add up what you make each month from every income source you have. Look at your paystubs to see your actual take-home pay (not your gross income, which doesn’t account for taxes taken out by your employer). Also include any other sources of money coming in, like child-support payments, interest on savings, and income from side hustles—add it all up. Be sure to account for any funds you need to set aside for taxes on money you earn as an independent contractor.
Okay, got the number? That’s what you’ll be slicing up into 50/30/20 percentages. You can use this handy NerdWallet calculator to calculate how much money you’ll have for each category.
2. List out your “needs”
Next, make a list of your needs—everything you can’t do without—and the monthly cost for each one. Make sure to snag the expenses that don’t come up every month (like a quarterly water bill or a twice-yearly oil change). For example, if you’ll spend $50 on an oil change every six months, you could figure the monthly cost by dividing $50 by six. (You might want to check out this deeper dig on working variable expenses into your monthly budget.)
Now compare the total monthly cost of your needs to your income. If they’re under 50% of your monthly income (or pretty close), head straight to step 2!
Don’t fret if your needs add up to more than 50% of your take-home pay. First consider ways you could trim your expenses. (Here are some tips to save on streaming services, cut your heating bill, and reduce your electric bill.) Don’t cut too close to the bone here; if you make your budget too tight, you’re more likely to get discouraged and blow your plans. If your needs wind up being more than 50% of your income even after some tightening, just reduce the percentage you’ll devote to wants and debt/savings accordingly and see how your budget shakes out. (Another option is to try a zero-based budget approach instead).
3. Figure out your “wants”
Next up in your 50/30/20 budget: wants. It’s time to list out your wants and how much they cost each month. It’s easy to get pie-in-the-sky here (we can all come up with lots of things we’d buy if money was no object!), but try to stick to listing the things you already tend to spend money on. Take a look at your transactions over the last couple months—which of them were nice-to-haves? Get a realistic accounting of the don’t-need-but-really-want expenses in your life.
Now total up the cost of your wants—is it around 30% of your take-home pay? If it’s way over, you might need to prioritize and decide which wants are most important to you. Here are some tips on having fun on a budget if you need to tighten up your discretionary spending.
Budget tip: Finding that your wants are coming out at way over 30%? Consider saving up for your big “wants” over a couple of months and moving them into the savings category. In your Simple Account you can drop that money in a Goal and, when you’re all funded, go out and buy that TV you’ve been dreaming about! Get the details on how to use Goals.
4. Decide your debt/savings split
The last 20% of your income will go toward debt and savings. List the details of all your debts—not the minimum monthly payments (you’ll have included those in your needs)—but the total amount you owe and how much interest you’re paying on each loan or credit card.
Also take a few minutes to generate a list of your savings goals. What do you want to achieve in the next year? In five years? Take into account any plans in the works like a family reunion or being in a friend’s wedding.
Now take a look at your two lists and reflect on what matters most to you. Does getting out of debt feel most urgent to you? You may want to put the largest portion of your money toward paying extra on your monthly credit card bills. On the flip side, you might have a pressing savings goal—like stashing for emergencies or getting a down payment together—that makes saving up feel more important right now.
Remember, you’re putting 20% of your income toward both paying off debt and building your savings—you can split that 20% however you like (and you can always adjust it later). If you’re not sure how to sort it out, this guide can help you decide whether to focus more on debt or savings right now.
5. Learn (and adjust) as you go
Nice job, you’ve got a 50/30/20 budget! Now you just need to stick to it—and make tweaks along the way to handle life’s ups and downs. Here are a few tips for making that happen:
- Get a system. Whether you use an app, a spreadsheet, or pen and paper to track your budget, the more automatic your system is, the more sustainable your budget will be—so make it easy on yourself! If you’re already using Simple, here’s how you can track your Expenses in your app.
- Schedule a regular money date with yourself. Make sure to check your progress—weekly is a good frequency to start with—and expect to make adjustments as you learn. If your financial plan didn’t work out one month, don’t fret! You’ve learned that’s not the right approach for you, which means you’re one step closer to finding what will work for you. Tweak the details of your budget and try again.
- Celebrate your wins! It’s easy to focus on what didn’t work, but make sure you give yourself some high fives for what did work—it will help you stay motivated.
The 50/30/20 budget rule is a simple way to make sure you’re on track with the essentials, debt management, and saving—while making sure you’ve got money on hand for some fun stuff too.
Set up a 50/30/20 budget and see if it works for you! If it’s not your cup of tea, no sweat—there are other budgeting methods to try out (like that zero-based budget we mentioned earlier or envelope budgeting). No matter what method you use, getting your budget sorted will have you feeling calm, cool, and full of financial confidence.
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