What Is the 50/20/30 Budgeting Method?

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The 50/20/30 budgeting philosophy is a way to divide your take-home pay by category – needs, savings, and wants.

This budgeting strategy defines needs as monthly bills that you must, such as your mortgage or rent payments, your student loans, grocery bills, utility bills, and healthcare costs, versus things you want to buy, like eating out or buying clothing. It also allocates 20% of your budget for savings or to reach other financial goals, like paying off debt.

This strategy can help you keep your priorities in mind, but it is also flexible, meaning if you do not spend all fifty percent on essentials, then you can assign that to either your financial priorities or to your lifestyle choices categories. It is important to understand how each of these categories is divided as you consider the budget. This budgeting rule can also help you if you are trying to budget with a variable income.

Learn more about the 50/20/30 savings plan and if it's the right strategy for you.

Understanding Needs

The needs category when using the 50/20/30 budgeting rule includes anything you have to pay. This includes basic needs or necessities, such as rent or mortgage payments, transportation costs (car payment, insurance, gas money), your utilities (electricity, water, and heat), and grocery bills (but not eating out).

However, it is important that you do not confuse your necessities with your luxuries when you are budgeting this way. For example, this 50% covers the cost of groceries, which are a need, but not eating out, which is a want.

Understanding Savings/Financial Goals

This percentage of your income is reserved for saving money and reaching other financial goals, such as paying off student loan debt. Remember, it is important to have financial goals no matter your financial situation.

Allocating 20% of your take-home pay off the bat to this category is a great way to get into the habit of saving money. It will also help you reach your other financial goals more quickly. Here's why: since you are putting this amount of money away each month as a habit, it will be working toward your financial goals without you even thinking about it. After all, we all know that once the money of your direct deposit of paycheck hits your account, it's much easier to spend it.

However, if your debt, especially credit card debt, is making it difficult to cover your basic expenses, you may need to adjust this percentage until you get your situation under control.

Understanding Wants

With this budget, you get to spend the remaining 30% of your take-home pay on discretionary spends, or putting it simply, on wants. This can be anything from a new outfit to a dinner out to contributing to a vacation fund.

This can be appealing because it means that you have guilt-free money on things you want. This category will include things like gym memberships, eating out, cable TV or streaming services, entertainment costs, vacations, and clothing.

Implementing the Budget

While the 50/20/30 budgeting philosophy is a great tool to properly allocate your money, it will not help you manage your day-to-day budgeting tasks, like tracking your expenses. You need to select a budgeting system to do that.

As you set up your budget each month, you can divide up the amount in each of the categories to see if you are on track with following this philosophy. If your spending and priorities are out of balance, you can take the steps to adjust them. You may find that you need to work at getting your essentials down so that you can work on your priorities. If you have a large amount of debt, you may need to adjust the amount you spend on each of these three areas until you get it under control.

While budgeting can seem restrictive, it's important to remember that budgets are simply a tool to help you reach your financial goals, a way to make your money work for you. Budgeting takes effort, but it can help relieve financial stress and make managing your money a lot easier.

Updated by Rachel Morgan Cautero