Inspired by Next Door®
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 popular budgeting rule 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 are the basics of the 50/30/20 budget rule?
Spend no more than 50% of your monthly take-home pay on needs.
- Things like rent, utilities, insurance, groceries and minimum debt payments.
Spend about 30% on your wants.
- Things like dining out, entertainment, ride-sharing services and shopping on luxury items.
Add at least 20% to your savings.
- Things like extra payments on your debts or savings for things that will benefit you long-term (like your all-important emergency fund, your retirement, the down payment for a future home purchase, etc.).
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% SAVE = $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 401(k) retirement contribution — doesn’t count in the equation.
Steps for starting your 50/30/20 budget plan
- Take an inventory of all your expenses. The Next Door® 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.