The 50/20/30 Rule: How to Build a Budget That Works

When people hear “budgeting”, they think “borrringggg”. But budgeting doesn’t have to be complicated, stressful, or boring. In fact, it can be surprisingly simple (and dare we say, fun) once you have a game plan. It’s also necessary to do if you want to save and invest in the future, so if you haven’t created a budget, you need to start TODAY. One of the easiest and most popular ways to manage your money is by following the 50/20/30 Rule. This rule breaks down your spending into three easy-to-follow categories: needs, savings, and fun stuff. Let’s see how it works!

What is the 50/20/30 Rule?

The 50/20/30 Rule is just a guideline that helps you allocate your monthly income (after taxes) into three main categories: needs, savings, and wants. It’s designed to make budgeting less intimidating by giving you a clear structure, so you know exactly where your money is going each month. Let’s break it down:

• 50% for Needs: These are the non-negotiable expenses you can’t avoid. Rent, utility bills, groceries, insurance, and car payments all fall under this category. If you have pets or kids, include anything the keeps them thriving. Basically, if you absolutely can’t live without it (or get kicked out without it), it’s a “need.” Don’t try to convince yourself that you absolutely “need” that new watch - it won’t work with us!
• 20% for Savings: This is where the magic of building wealth begins. You want to allocate 20% of your income to savings and investments. This could be an emergency fund, paying down debt, or contributing to retirement accounts like a 401(k) or IRA. The goal here is to set yourself up for a financially secure future. Remember, saving is the first step to investing!
• 30% for Wants: Here’s the fun part (wait, you’re not having fun yet?)! This category covers anything that makes life more enjoyable but isn’t essential for survival—think eating out, food deliveries, vacations, Netflix, luxury skin care products, hobbies, and entertainment. You don’t have to cut out everything fun to stay on budget—just be mindful about how much you’re spending in this area. Some people make the mistake of convincing themselves that some “wants” are actually “needs” when they really aren’t.

The beauty of the 50/20/30 Rule is that it strikes a balance between being responsible with your money and still enjoying life. We don’t want you to be unhappy. It’s not about depriving yourself of the joys of life—it’s about creating healthy spending habits that make sure your needs are covered, your future is secure, and your wants are enjoyed within reason.

How to Get Started

1. Figure out your monthly income: Take your total take-home pay (after taxes).
2. Categorize your expenses: Look at your bank or credit card statements from the last several months and divide your spending into needs, savings, and wants. Doing this will help you figure out what your needs are (and how much they cost).
3. Make adjustments if necessary: If your needs take up more than 50%, try to cut back on wants or find ways to lower fixed expenses.
4. Automate your savings: Set up automatic transfers to your savings account so you don’t forget to put that 20% away.
5. Check-in regularly: Review your budget every few months to make sure it still works for you.

Before you stress yourself out about having exactly 50%, 20%, or 30% of your earnings allocated to these categories, remember that the rule is flexible! If you have high rent or student loans, you might need to adjust the percentages a bit. The point is to give yourself a simple framework that helps you get started and keeps you on track without it stressing you out every day. You should also adjust your budget as you make more (or less) money. If you’re comfortable increasing your savings bucket and decreasing your fun bucket, go for it!

A Sample 50/20/30 Budget

Here’s a more detailed breakdown of how a sample 50/20/30 budget might look if you take home $3,500 per month after taxes:

• 50% Needs: $1,750
  • Rent/Mortgage: $1,100
  • Utilities (electricity, water, internet): $150
  • Groceries: $400
  • Transportation (gas, public transit): $100
  • Insurance (health, car, etc.): $150
• 20% Savings: $700
  • Emergency Fund: $200
  • Retirement Savings (401(k), IRA): $300
  • Debt Repayment (student loans, credit cards): $200
• 30% Wants: $1,050
  • Dining Out: $200
  • Entertainment/Streaming Services (Netflix, Spotify): $50
  • Shopping (clothes, hobbies): $200
  • Travel Fund/Vacation Savings: $250
  • Gym Membership/Activities: $50
  • Miscellaneous Fun Spending (concerts, outings, hobbies): $300

The 50/20/30 Rule is a simple way to build a budget that helps you cover your essentials, save for the future, and enjoy life without guilt. Start small, adjust as you go, and remember: budgeting doesn’t mean you can’t have fun at all—it just means making sure you’re in control of your money instead of the other way around.