A Guide to Budgeting: 50/30/20 Method Explained

ByAngelique Cruz
Edited byScott Strandberg

Updated: May 15, 2023

ByAngelique Cruz
Edited byScott Strandberg

Updated: May 15, 2023

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There are countless budgeting methods available, but one of the most popular is the 50/30/20 rule. This budgeting method proposes that 50% of your income should be spent on needs, 30% on wants and 20% on savings. The 50/30/20 budget method helps individuals achieve their financial goals while ensuring they have funds for what they need and want. It's simple, straightforward and easy to use, making this method ideal for budget beginners, students and young professionals.

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Understanding the 50/30/20 Budget Rule

Managing your finances involves making wise decisions with your money, and knowing how to budget plays a significant role. The best way to determine whether the 50/30/20 budget method works for you is to understand how it works and how to identify needs, wants and savings.

50% for Needs

Needs are expenses that you must pay no matter what. These mandatory costs include groceries, rent (if you don't own your home) or mortgage payments (if you do). Insurance premiums also fall in this category. If you want to determine what should be part of your needs, think about only the essentials — things that you need to survive.

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30% for Wants

Not everything you spend money on is a must-have. Things like that long-awaited vacation, dinner on a Friday night or spa days with your girlfriends are luxuries.

According to the 50/30/20 rule, you can allocate 30% of your income (post-taxes) to discretionary expenses. Remember, everything you put here is optional, but it's a way to reward yourself and may contribute to your overall well-being.

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20% for Savings and Investments

The 20% in the 50/30/20 budget method goes toward your long-term financial goals. You'll never know when you'll hit a rough patch, and it's always wise to set something aside in preparation for a rainy day. Several things can fall into this category, including putting funds into a savings account, contributing to a 401k or investing in stocks. This part of the budgeting model ensures you have some money set aside for your future.

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How to Use the 50/30/20 Method

Knowing what the 50%, 30% and 20% ratios mean is only the beginning. Let's see how the 50/30/20 budget method works by applying it to a real-life scenario.

We'll work with a specific amount as post-tax income and break it down according to the 50/30/20 rule. We'll also look at the possible expenses under each ratio and discuss how to perform checks and balances after the entire process.

1

Identify Your After-Tax Income

The first thing you must do is determine how much you bring home each month. Remember, you're only looking at post-tax money. Let's say that, after taxes, you come up to a monthly income of $4,000.

2

Divide Your Income Accordingly

Now, let's apply the 50/30/20 rule. Half of your income (50%) goes to your necessities, so that's $2,000. Next, multiply $4,000 by 30% to get your allocation for discretionary spending. That comes to $1,200. The remaining amount ($800) is for your savings — that should be 20% of your income.

3

Detail Your Needs, Wants, Savings and Debt Repayments

Here is where you'll spend a bit of time. We'll go through each ratio allocation and break it down further. First, let's look at your mandatory expenses. Remember, these are non-negotiables — you need to spend on these to survive. Here's how you can break down the $2,000 for this category:

  • Mortgage (or rent): $1,000
  • Utilities (electricity, gas, water, internet): $200
  • Groceries (food and other household items): $400
  • Transportation (gas, public transportation, car insurance): $400

Next, focus on your nice-to-haves. Similarly, let's divide the $1,200 between different wants. Consider the following:

  • Dining out and entertainment: $400
  • Shopping and personal care: $400
  • Hobbies and leisure activities: $200
  • Miscellaneous expenses: $200

Lastly, divide your remaining $800 between your savings and debt repayment. You can split it like this:

  • Emergency fund: $200
  • Retirement savings: $400
  • Debt repayment (credit card, student loans, etc.): $200
4

Follow the Budget and Adjust as Needed

Keep your numbers in mind. At the end of the month, see how well you fared and make the necessary adjustments. Remember, the 50/30/20 budget method allows you to meet your necessary financial obligations while also rewarding yourself and ensuring you have something saved for a rainy day.

Pros and Cons of the 50/30/20 Budgeting Rule

All budgeting models have something different to offer. However, none of them are perfect. The 50/30/20 budget method has benefits and drawbacks, and knowing these can help you decide whether or not it's worth a try.

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50/30/20 Budget Rule FAQ

The 50/30/20 budget model can be an effective money management tool, but you must consider several factors before deciding if it's your best option. The answers to these frequently asked questions may provide you with additional information.

What is the primary goal of the 50/30/20 rule?
Do you use the 50/30/20 budget model weekly or monthly?
How do you differentiate between wants and needs?
What can I do if I exceed the 50% or the 30% categories?
What if I don’t think this budgeting model works for me?
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Related Resources

Budgeting is an excellent wealth management tool — and you can explore other models and applications to help you with your financial aspirations. We included these online resources that could provide tips, techniques and strategies for budgeting.

About Angelique Cruz


Angelique Cruz headshot

Angelique Cruz has been researching personal finance for three years, with expertise in macroeconomics, financial statistics and behavioral finance. After a decade-long stint as a management consultant creating professional and personal development programs, she now specializes in writing informative content around personal, auto and home loans. Angelique has a degree in psychology from the Ateneo de Manila University.


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