What Is the 50/20/30 Budgeting Method?

How to Calculate Spending With the 50/20/30 Budgeting Method

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The 50/20/30 budgeting method is a spending plan that has you set aside 50% of your take-home pay toward needs, 20% toward savings and debt repayment, and 30% toward wants. It makes monthly budgeting more flexible and sustainable since it focuses your spending on broad categories and avoids the need to budget for individual expenses each month.

If your spending priorities are out of balance, take the steps to adjust them by understanding how the 50/20/30 method works and how to put it to use to make monthly budgeting quicker, easier, and more efficient.

What Is the 50/20/30 Budgeting Method?

The budgeting method carves your take-home pay into three easy-to-remember categories at fixed percentages:

  • 50% to needs: No more than half of your take-home pay should go toward needs, defined as any bills you have to pay to meet your financial obligations. This includes basic needs or necessities, such as rent or mortgage payments, transportation costs (car payment, insurance, gas money), utilities (electricity, water, and heat), and grocery bills.
  • 20% to savings and debt repayment: This percentage of your income is reserved for saving money, reducing debt, and reaching other financial goals. It includes funds you set aside to save for retirement, build an emergency fund, or pay off credit card debt.
  • 30% to wants: With the 50/20/30 budgeting method, you allocate the remaining 30% of your take-home pay toward discretionary spending, or wants. This category includes things like gym memberships, entertainment, and dining out.

Take advantage of the flexibility of the 50/20/30 budgeting method. While wants should be no more than 30% of your budget, you can reduce that percentage if you prefer to save more or don't spend much on leisure. Likewise, if you're a high earner, you may not need to spend all 50% on essentials and can assign more to either savings or wants.

How Do You Calculate Your Spending With the 50/20/30 Budgeting Method?

If it's your first time budgeting with this method, start by assessing your monthly take-home or after-tax pay (also known as net income). If you have a variable income, use your average monthly net income (last year's annual income divided by 12). Then, divide your take-home pay into needs, savings, and wants according to the recommended percentages set forth by the rule.

Let's say you bring in $3,000 per month after tax. Multiply $3,000 by 0.50, 0.20, and 0.30 to calculate how much to spend on needs, savings and debt, and wants in a month, respectively.

Equate to calculate spending allocations with 50/20/30 budgeting method

How the 50/20/30 Budgeting Method Works

Once you've calculated your monthly spending allocation, implement the budget in a few steps:

  1. Set aside money for each category: Set aside the allotted amounts at the interval you choose—either once a month into each of the three categories or in piecemeal from each paycheck. If you prefer to set aside a percentage or dollar amount from each paycheck, divide the monthly percentage or calculated dollar allocation by the number of paychecks you receive each month to determine how much to set aside from each paycheck to each category. For example, if you bring home $3,000 each month and receive two paychecks per month, allocate 25% (50% divided by 2) or $750 ($1,500 by 2) of each paycheck toward needs, 10% or $300 toward saving, and 15% or $450 toward wants.
  2. Classify and track your expenses over the month: Using a spreadsheet or a budgeting app or software, accurately categorize and record your expenses (as needs, savings, and wants) as you incur them to avoid overspending or underspending in any category.
  3. Adjust your spending as needed: If you find that you're spending too much or too little in a given category, make adjustments as needed to your spending to come in on budget by the end of the month. Likewise, if your spending priorities are out of balance, tweak them. For example, you may need to reduce your spending on needs if you want to save more aggressively for retirement or pay down a number of overwhelming debts. Over time, you should be able to better prioritize your spending on the expenses that matter most to you.

Don't confuse needs with wants when you classify expenses. For example, the 50% should cover the cost of groceries (a need), but not eating out (a want).

Difference Between the 50/20/30 and Other Budgeting Methods

The 50/20/30 method provides a more flexible alternative to other common budgeting techniques, including the:

  • Zero-dollar budget: With this type of budget, your monthly take-home pay minus your monthly expenses equals zero since every dollar you earn has a specific purpose. You'll divide your expenses into more categories (groceries, gasoline, and entertainment, for example) and subtract them from your take-home pay until there's no money left. This method is a good option for those who need more structure in their spending, but it's more rigid and requires more work than the 50/20/30 method since it requires budgeting for individual expenses.
  • Envelope budget: This budgeting method asks you to set aside cash for each spending category in labeled envelopes. The finite amount of money in the envelopes keeps you from overspending in a way that the 50/20/30 method can't, but cash can be cumbersome and removes the option to pay certain bills by credit card. The 50/20/30 budgeting method gives you the option to make payments in any way you choose.

Limitations of the 50/20/30 Budgeting Method

As versatile as the budgeting method is, it has constraints:

  • Broad spending categories: The flexibility of the category definitions can work against you. If you misclassify wants as needs, you're liable to overspend on luxuries by a considerable amount and run out of money for necessities.
  • Small savings allocation: The 20% allocation for savings and debt repayment may encourage you to save less than you need to meet your future financial goals. You may also make smaller payments toward debt, which can keep you in debt longer.
  • Separate system for expense tracking: While the 50/20/30 budgeting philosophy is a great tool to allocate your money, it won't eliminate the need for or provide a means to track your daily expenses, which is a must if you want to stay on budget. You'll need to use a budgeting app or another system for that.

Key Takeaways

  • The 50/20/30 budgeting method allocates your take-home pay into three fixed percentages for needs, savings, and wants.
  • It helps you prioritize your spending on the expenses that count.
  • It's more flexible than other common budgeting methods, but its lack of structure and small allocation for savings may prevent you from meeting financial goals.

Article Sources

  1. Consumer Financial Protection Bureau. "My Spending Rule to Live By," Page 1. Accessed June 15, 2020.

  2. Experian. "How to Budget Using the 50/30/20 Rule." Accessed June 15, 2020.