The 50/30/20 budget breaks down all your expenses into three broad categories: needs, wants, and savings. For budgeting beginners or those looking to avoid tracking every single transaction, this method can simplify personal money management in the present while still preparing for future needs and wants through savings.
First, allocate 50% of your income to needs or expenses you cannot avoid. In this category are housing, food, transportation, utilities, health care, insurance, and the minimum amount due on any outstanding debts.
Next, designate 30% of your income to wants or expenses that are not essential, but are nice to have or “upgraded” versions of necessities. These items can include dining out, gym memberships, or travel.
(Learn how to differentiate between a need and a want on our Money Management blog!)
Lastly, set aside 20% of your income for savings. Here is where you fund your short-term savings goals, such as an emergency fund; long-term goals, such as retirement; or extra payments on loans, credit cards, or other debts.
Why 50/30/20 May Work for You
The primary benefits of the 50/30/20 method are that it is reasonably straightforward and easy to implement. Additionally, this method allows for adjustments, prioritizes savings, and addresses multiple goals at once.
- Flexible: You can adjust the framework for your situation. Try a 60/20/20 split instead, or commit to saving $25 to $50 monthly.
- Pay-yourself-first: The built-in savings commitment (versus only saving whatever is leftover) helps build the savings habit and allows you to advance toward your savings goals at a manageable pace.
- Balance: Importantly, this method allows for a healthy mix of “work/play.” There is room for fun while still ensuring you meet your needs today and tomorrow without feeling deprived.
Sound like a good fit? Here’s how to get started:
- Determine your after-tax income. Review your pay stubs to see your take-home pay plus non-taxed deductions. This number is what you will split by 50/30/20.
- Sort your current spending habits into the three categories, and make adjustments as needed. Use NerdWallet’s 50/30/20 calculator to get the numbers for each group.
Why 50/30/20 May NOT Work for You
As with everything money-related, there is no one-size-fits-all solution. The 50/30/20 method may not fit given your living situation.
- Income limited or variable: Depending on your earnings (either too low or too inconsistent month-to-month) and the cost of living, 50% for all your needs won’t cut it, and adjusting the percentages isn’t realistic.
- Not a “quick-fix”: The long-term goal with this method is to build wealth and stability. It is not a fast, easy solution to money shortfalls or ongoing emergencies.
- Too broad: For some people, the broad categories make it difficult to see areas of overspending. For example, if all wants are together, you may not notice how much you spend on dining out specifically.
Looking to budget, but the 50/30/20 method is not a good fit? Try one of these instead!
- 80/20 budget: Similar to the 50/30/20 approach, the 80/20 split divides post-tax income to 20% for savings and 80% for everything else.
- Zero-sum budgeting: “Give every dollar a job” by spending or saving exactly as much as you earn.
- Envelope system: Set spending limits using real or virtual envelopes.
Money Management E-Newsletter: February 2020