If you’ve ever wondered how much of your take-home pay (after taxes) you should be spending on housing versus entertainment versus saving, one of the popular budgeting rules is the 50/30/20 financial plan.
While there’s no best way to split up income that fits 100% of us, balancing your personal spending and saving can add comfort and confidence to your financial picture. And the 50/30/20 rule is a pretty straightforward way to manage your personal finances.
What is the 50/30/20 budget rule?
Spend no more than 50% of your monthly take-home pay on needs. Things like:
- Minimum debt payment
Spend about 30% on your wants. Things like:
- Dining out
- Ride-sharing services
- Shopping on luxury items
Add at least 20% to your savings. Things like:
- Extra payments on your debts
- Begin or grow your emergency fund
- Additional towards your retirement or an individual retirement account
- A down payment for a future home purchase
Here’s a 50/30/20 budget example for someone who takes home $2,000 a month:
50% Needs = $1,000
30% Wants = $600
20% Savings = $400
Important reminder: The 50/30/20 budget rule only considers your take-home pay for the month, so anything automatically deducted from your paycheck — like your work health insurance premium or 401k retirement contribution — doesn’t count in the equation.
Keep in mind, living in major cities like New York or San Francisco may require you to budget more than 50% in your needs category primarily due to the high cost of rent or housing.
How to set up a 50/30/20 rule budget
- Take an inventory of all your expenses. This monthly budget worksheet is a great resource for getting started.
- Classify each expense on your worksheet as either needs, wants or savings.
- Keep in mind that these terms don’t exactly correspond with the definitions of fixed, variable and non-monthly expenses. You might pay the same amount every month for a TV streaming service, which means it’s a fixed expense, but it is clearly a want — not a need.
- Add up your needs, your wants and your savings.
- Add up your expenses for the month.
- Divide the total of your needs by your total expenses. Multiply the decimal by 100 to see the percentage you spend on needs.
- Do the same for your wants and your savings.
- Compare your needs, wants and savings percentages to the 50/30/20 rule to see how balanced your budget is.
- Set small, realistic goals to reduce spending on needs and wants, so you can increase your savings. Start small and go from there!
Small changes can deliver big results
Even if you can’t achieve the 50/30/20 budgeting plan right now, working to make small changes can get you closer to financial balance. Small actions starting today can lead to big changes over time, so don’t let budget perfection discourage you from making progress.