The 50/30/20 Budgeting Method and How It Works

Have you ever tried to create a budget for your finances and given up because of how tedious the process was? There are many ways to take control of your spending and savings habits, but many methods aren’t sustainable for a large number of the population.
The 50/30/20 budgeting method, however, is one of the easiest ways to begin managing your money more efficiently. This budgeting strategy is easy to start, manage, and track, and might help you keep your 2021 New Year’s Resolution to reach your financial goals.
Here's everything you need to know about the 50/30/20 budgeting method so you can decide if this money management strategy is right for you.

What is the 50/30/20 Budgeting Method?

The 50/30/20 budgeting tool was a financial strategy developed by United States Senator Elizabeth Warren and her daughter Amelia Warren Tyagi. Warren detailed this method in her book, “All Your Worth: The Ultimate Lifetime Money Plan” and her simplified ideas about managing money and budgeting have continued to remain popular.
To manage your money with the 50/30/20 budgeting method, you’ll follow three easy steps: figuring out your expenses (or needs), determining your wants (items/services you spend money on), and setting aside money for savings. This simple format makes this budgeting method easy to start, follow, and alter as your finances change.

Rules for the 50/30/20 Budgeting Method

The 50/30/20 budgeting method works like this: you’ll put half of your money towards bills and expenses, 30% towards discretionary spending and items/services that you want, and 20% towards savings.
To get started, you’ll first need to understand how much you make (gross income). You’ll want to calculate your net income or take-home pay for the month. You can do this by looking at the salary you receive after taxes are deducted. You can divide your yearly after-tax salary by 12 months or figure out your daily salary and multiply this number by days in a month. If you’re paid twice a month (for example on the 1st and 15th), you’ll simply add these two amounts together to get your take-home monthly income.
Once you know this number, it’s time to start splitting out where your money goes.

50% needs or living expenses

The largest category in this budgeting method addresses expenses you need to pay as a basic cost of living. When you’re identifying your needed expenses, look for the items and services you’re required to pay for on a monthly basis in order to survive.
This includes:
  • Rent/mortgage
  • Utilities (including your cell phone)
  • Insurance
  • Student loans
  • Personal loans
  • Credit cards
  • Additional debt payments
  • Groceries
  • Transportation
It’s important to think of this category of spending as expenses you could not live without. It does not include subscription services, streaming networks (like Netflix or Hulu), or anything else you choose to spend your money on. I do recommend including your cell phone bill here, because while some might argue it’s a luxury, in today’s modern world, you likely work, communicate, and even shop from your cell phone.
When factoring in debt payments, only factor in the minimum payments due. This budgeting method theorizes that you should be able to pay all of these expenses with half of your after-tax income.
Don’t panic if your number is higher than 50% of your take-home pay. Instead, see if you can figure out why. Maybe you’re paying too much in rent and should look into a more affordable living space. If your grocery bill seems high, decide if there are ways to save or scale back. Likewise, look at your insurance and utility bills and see if there are other providers you can switch to in order to save money.
If debt is the main reason why your expenses are so high, you can consider refinancing your debt to get a lower rate and monthly payment. If that’s not an option, don’t worry. I’ll cover what to do when we reach the savings category.

30% wants or non-essential expenses

This next category addresses items you spend money on that are not essential, but rather, optional items or services you choose to pay for.
These include:
  • Streaming services
  • Subscription boxes
  • Gym memberships
  • Restaurant meals (including takeout)
  • Paid apps
  • Events/entertainment
  • Vacations
  • Non-essential clothing
  • Home decor
Your gym bill might seem essential, but you could work out from home or run/jog outdoors for free. Think of it this way — if you lost your job and had to pare down to essentials only, every other expense would likely fall into the “wants” list.
This can also include any upgrade you choose to pay for. For instance, your cell phone bill may be essential, but choosing to pay for an upgraded phone every year is a choice, not a necessity. Factor the upcharge for the phone in your 30% bucket.

20% Savings

Lastly, 20% of your post-tax income should go into savings. This is a broad bucket, allowing you to decide what type of savings you need, depending on your specific financial goals.
Savings could include:
  • Emergency fund
  • Traditional savings account
  • High-yield savings account
  • Retirement savings (401ks, IRAs, CDs, retirement investment accounts)
  • CDs
  • Money market accounts
  • Investments
In addition, if you’re hoping to pay off your debts sooner than anticipated, any money above and beyond your minimum required monthly payment should go here. For example, if you owe $5,000 on an auto loan and your minimum required payment is $150 per month, this payment would come out of your “Needs” fund. If you opt to pay $300 per month, the additional $150 would come out of your “Savings” fund.
If you don’t currently have a savings account or aren’t sure where to get started, I always recommend building an emergency fund first and then moving on to other savings goals. Your emergency fund should have enough money available to cover 3-6 months of expenses (from your “Needs” category). Then I would recommend investing in your retirement and other short- and long-term savings goals.

50/30/20 budgeting example

Here’s a quick example to help you better understand the rule of thumb for this budgeting method.
Let’s say you bring in $4,000 a month after taxes. Here’s a quick breakdown of how your budget should look.
Budget CriteriaEstimated Monthly BudgetActual Monthly Expenses
Needs$2,000Rent - $950, Utilities - $250, Insurance - $100, Groceries - $300, Cell Phone - $50, Gas - $100, Minimum debt payments - $250
Wants$1,200Streaming Services - $50, Restaurants - $200, Takeout - $250, Subscriptions and memberships - $100, Misc shopping - $400, Events/entertainment - $200
Savings$800Emergency fund - $400, Retirement plans - $200, Investments - $200
In this scenario, every dollar is accounted for to equal exactly 50%, 30%, and 20% of your income. Of course, in real life, you might find yourself spending 55% on needs, 20% on wants, and 25% on savings. You can adjust up and down slightly to make this method fit best for your lifestyle, but if your needs and wants are both much higher than the suggested percentages, you may want to look at ways to reduce your spending.

Who is this budgeting strategy best for?

College students and professionals new to the workforce

This broad budgeting technique will help college students and anyone new to managing their money begin to understand how to build a budget, spend their money smartly, and grow savings over time. The 50/30/20 method is my favorite beginner budget that’s idea for anyone with their first job or returning to the workforce after a long absence.

Anyone new to budgeting

If you’ve struggled with budgeting in the past or find it tedious to categorize your spending into many different buckets, this straightforward budgeting strategy can help you better understand where your money is going and if you need to make any lifestyle adjustments to hit your financial goals. It’s an easy, judgment-free strategy that offers flexibility and forgiveness, and can easily be applied to most income levels.

Anyone struggling to build savings

Achieving savings goals can be difficult if you aren’t sure where to start. This method will allow you better control over where your money goes once it hits your bank account and will help you build and flex healthy money habits.

Who is this budgeting strategy not for?

Anyone struggling to make ends meet

While I always recommend reviewing your finances to see if you might be able to find new ways to cut expenses, if you know you’re spending most (if not all) of your paycheck on necessities, it’s likely not the right time to focus on budgeting your money. Instead, focus on what you’re able to pay down and wait until you’re able to lower your expenses or increase your income before starting a budget.

Those with large savings goals

While this budgeting technique is great for new savers, it’s not going to be helpful in the long run for anyone with lofty savings goals. If you’re looking to fund a down payment for a home, fund your child’s college tuition, or grow your retirement account, you’ll likely need to place a higher emphasis on savings than this methodology does.

Anyone looking for in-depth budgeting insights

The 50/30/20 method is popular because it’s simple, fast, and flexible. If you need more discipline or prefer to do a deep review of your finances routinely, you might fare better with a more structured and rigorous budgeting routine. That said, you can break this budgeting rule down into sub-categories to help achieve smaller goals, but you’ll be creating your own budgeting strategy at that point.

How to get started with the 50/30/20 budgeting method

Getting started with the 50/30/20 budgeting strategy is fairly simple. I recommend using a tool like Mint (it’s free!) to set up your budgeting goals. Your bank might also offer a budgeting tool or insights into where your money is being spent across different categories.
If you don’t want to use an app, you’ll first begin by figuring out how much you need to spend on the “Needs” or essentials category each month. Hopefully, this number is somewhere around 50% of your take home pay. If not, try to see where adjustments can be made.
Once you have your number determined, I would set up a savings rule in your bank account to automatically move 20% of your take-home pay to your savings account. If you receive $1,200 every two weeks, automatically have $240 moves to savings on deposit days.
Some people like to separate their needs and wants spending into separate accounts. While this can work well, I always recommend having some sort of cushion (a few hundred dollars, if possible) when doing this to prevent overdraft fees in case you accidentally overspend one month.
Be sure to review your finances regularly (daily or a few times a week) and adjust as needed to make this plan work for you.

Pros and cons of the 50/30/20 budgeting method

Pros

Complete flexibility

What I love most about the 50/30/20 budgeting method is how easy it is to customize and adapt on the fly. For instance, if you forgot to include your car insurance in your Needs account (because you only pay twice a year), no problem! You should have the money you need already saved in your savings account. Have you decided to cut down on lifestyle purchases? Great! You can add more to your savings to fund your dream vacation even sooner.

Set it and forget it mentality

Budgeting can be difficult — not because it’s a hard task, but because it’s tedious and requires a lot of focus and energy. The 50/30/20 method, on the other hand, is very simple to adapt to and easy to continue when changing jobs, experiencing pay decreases or increases, or when incurring additional expenses. If you feel like you don’t have the time to budget, this method might change your mind.

Offers reflection on what’s really essential

I do love that this budgeting method forces you to reflect on what’s really serving your life. You’ll need to determine how much you spend on essentials and non-essentials and figure out where to scale back (if needed). Completing this exercise can help you to make valuable decisions about what’s most important in your life. For instance, you might realize spending more than half of your paycheck on a dream condo in the city isn’t worthwhile if you can’t afford to go out and enjoy the atmosphere, culture, and dining options this city has to offer.

Cons

Little focus on debt repayment

Most budgeting plans focus heavily on debt repayment which can be a smart strategy if you’re looking to save hundreds or thousands in interest. However, not everyone can afford to pay down debt quickly, which can lead to negative feelings when budgeting. While I love that the 50/30/20 plan allows you to spend more than you save (making it an easy plan to commit to), if you do have the capacity to cut spending and save more, this method makes it easy not to.
If you have student loans, car payments, credit card debt, collections accounts, medical debt, or personal loan payments, it’s extremely important to really go through your spending habits with a fine-toothed comb to identify where you might be overspending. This budgeting technique falls a bit flat here.

Too open-ended

If you’re struggling to manage your budget, there’s often a reason why. Curbing non-essential spending can be challenging, and if you know this is a problem area for you, this method might not serve you well. Since this budgeting technique places a higher emphasis on discretionary spending than savings, it might enable you to continue the bad habits you were hoping to break.

It’s not a forever plan

The 50/30/20 budgeting method is a great way to get on track and begin managing your finances. It’s ideal for college students, young professionals, and anyone anywhere in their career who needs to get a handle on their wallet. But as you become more aware of where your money’s going, you’re likely to have less debt, fewer expenses, (hopefully) more income, and more savings needs. As you evolve along your financial journey, you’ll want to adjust where your salary is going.

The bottom line

The 50/30/20 budgeting method can help you begin to develop smart, intentional spending, and savings habits. I love that this personal finance budgeting technique offers a flexible, guilt-free way to manage your money, without cutting you off from spending on nonessentials that add meaning to your life. It can apply to most financial situations and is particularly helpful to new professionals or anyone just getting into budgeting.
While this budgeting strategy is perfect for anyone to dive into, I wouldn’t recommend it as a long-term budgeting plan for anyone looking to expand their savings goals.

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