Everyone has an opinion on how you should budget. From experts touting the latest app for online money management to bloggers giving personal perspectives on cash-only lifestyles, you won’t find a shortage of advice. You’ve likely heard of the 50/30/20 budget. First mentioned in Elizabeth Warren and Amelia Warren Tyagi’s 2005 book “All Your Worth: The Ultimate Lifetime Money Plan,” it’s now become mainstream — for good reason. The rule’s easy to remember and contains sound financial advice.
What Is the 50/30/20 Budget?
The 50/30/20 budget breaks your money up into three simple chunks: needs, wants and debt and savings. Sounds simple, right?
You start by calculating your monthly take-home pay. This is your salary minus taxes. If you have a health insurance plan or retirement contributions deducted from your paycheck, add those back in. OK, now you know your monthly pay, let’s divvy it up according to the budget.
It’s important to note that the 50/30/20 budget assumes you bring home roughly the same amount of money each month. If your income is less stable from month to month, you may want to find a budgeting method that works better for your situation.
50% of Your Net Pay for Needs
Divide your monthly pay in half. That number is the amount of money you’ll allocate for needs. Housing, utilities, health insurance, groceries, transportation and prescriptions all count as needs. Some debt is considered a need as well, such as credit card payments or car payments. If you miss payments, your credit score’s negatively impacted. Other needs include child support and alimony. Missing payments for either will get you in hot water. Therefore, it’s a need.
But that’s not an exhaustive list. If you’re not sure what’s a need versus a want, consider the impact if you take it away. Health insurance, for example, is a need because you’ll be fined if you forgo coverage. Plus, it’s essential for your wellness. Trickier situations, such as whether your cell phone is a need or a want, take more thought. It might be a need, but owning anything above a base model cell phone and basic phone plan tilts more toward a want.
“People don’t realize that many of their needs are really classified as wants (such as cable and morning lattes) and they may blow this ratio quickly,” Andrea Woroch, a consumer and money-saving expert, told SmartAsset. She suggests starting “by making an honest assessment of your spending and look for ways to improve and cut back.”
30% of Your Net Pay for Wants
Now for the fun stuff: wants. Multiply your monthly take-home pay by 0.3 to find the amount you have in this category. A want is anything that’s not a basic need to survive. Vacations, cable and Netflix, gym memberships and dining out all count as wants. Salon visits and clothes shopping are included in the category, as well. Where the line gets fuzzy is with expenses you may consider essential, but in reality, could live without. This could mean high-speed internet in your apartment or leasing a large car instead of economy-sized.
With the 50/30/20 budget, you allocate a larger percentage of your money for wants versus savings. You may want to change your allocations if your goal is to build wealth or pay down debt as fast as possible.
20% of Your Net Pay for Debt and Savings
To find what you should set aside for debt and savings, multiply your take-home pay by 0.2. For example, if your paycheck (after taxes) is $3,200 a month, you’d set aside $640 for debt and savings ($3,200 x 0.2). Savings include retirement accounts, emergency funds and whatever other financial goals you have. Woroch even recommends you “put [your] savings away first before paying for other luxuries.” A savings calculator can help you see how this money will grow over time.
As for debt, this category includes student loans or other debt you want to put extra money toward paying off. While the “needs” category may have included a large portion of your essential must-pay debt (such as your credit card), this money is for any extra payments you can make once you put aside retirement or health savings account funds.
You don’t have to feel tied to the 50/30/20 rule. If you want to tweak it to your personal financial goals, go right ahead! While you probably don’t want to dip below saving 50% for needs, you can always scale back wants and add more to your savings. On the flip side, if you’re debt-free and have healthy savings, perhaps you can allow yourself more wants. Or, perhaps you add a percentage for charitable contributions. Whatever your financial goals are, remember that making a plan is the best way to meet them.
Finally, Woroch cautions against jumping into the plan too quickly. While saving 20% may not seem like a lot, you may be surprised once you put it into practice. “Take it step by step though because it’s a lot easier to adjust to small changes than to a complete life overhaul.”
Tips for Budgeting
- Savings accounts and budgets go hand-in-hand. It’s the best place to sock the extra cash you’re saving. If you’re savvy, you’ll compare savings accounts interest rates and see where you can earn the most with your rainy day fund
- Freelancers can find it tough to stick to a budget. With irregular paychecks and quarterly self-employment taxes to worry about, you might find it impossible to find a budget that fits your situation. Fortunately, there are some best practices to follow when you have an irregular income.
- Consider working with a financial advisor to come up with a financial plan. A financial plan will evaluate your current situation and determine what steps you need to take to achieve your future financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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