Using the 50-30-20 Budget: Is It Right For You?

Reaching your financial goals takes discipline, time, and effort. Budgeting is one effective way to help you reach financial freedom. It allows you to gain control of your money, pay off debt, and save for the future. For some, just the thought of budgeting makes them feel restricted and overwhelmed. They may feel they don’t have the time or tools to create a budget, know how to get started with creating one, or even make enough money to have one. Despite these misconceptions, budgeting doesn’t have to be intimidating.

The key to successful budgeting is creating one that’s easy to follow and keeps you on track when it comes to managing your money. Not all budgets are created equally. There are many forms of budgeting to help you get your finances in order, such as the zero-based budget, the envelope system, or the snowball method. Sometimes it takes trying out different budgeting methods to find one that works best for you.

If you find budgeting a bit challenging or you’re just beginning to budget, the 50-30-20 budget is an easy method to help you take control of your finances.

What is the 50-30-20 budget?

The 50-30-20 budget method is a simple and flexible percentage-based budget to help you manage your money, live within your means, and reach your financial goals. This method is divided into three categories: needs, wants, and savings and debt. The 50-30-20 budget is suitable for budgeting for the first time or for individuals who need a less structured way to manage their money.

How does it work?

First, review your paychecks or bank account statements to determine your after-tax income (your take-home pay). Once you’ve determined your take-home pay, make a list of all your expenses for the last 2-3 months and group them into one of three categories (needs, wants, and savings and debt).


50% Needs Category (Must-haves)

The 50% category is designated for the essentials we need to survive, such as utilities, transportation, rent/mortgage, groceries, and health insurance. You’ll also want to include any minimum monthly loan payments (credit card payments, student loan payments, car payments, etc.) you have since not paying a loan on time could negatively impact your credit score if the account goes into default.

Your primary living needs should comfortably fit into this category. However, it’s possible that your expenses may exceed the 50% portion of the budget. If that's the case, re-evaluate your costs and find ways to reduce your spending in this category. For example, consider more affordable housing options, use coupons for grocery shopping, plan meals, carpool, compare insurance companies, or use public transportation to cut down costs.


30% Wants Category (Nice-to-haves)

The 30% category is designated for non-essentials such as entertainment, clothes, dining out, vacations, electronics, and cable. This category could be considered “fun money” or “nice-to-haves” because these non-essentials help make life more enjoyable and convenient. There’s definitely room in this category to cut expenses because you don’t need these items to survive. To reduce spending in this category, you can cut the cable cord, plan a staycation instead of going out of town on vacation, or change your phone plan to reduce this category’s spending.

If 30% seems excessive for non-essentials, you have the flexibility to shift a portion to the needs or savings category. Just because you have 30% to spend on entertainment doesn’t mean you should, especially if you’re trying to eliminate debt or save for an emergency.


20% Savings Category

The 20% category is reserved for savings and additional debt repayment. This money is allocated for building your emergency fund, retirement savings, investments, and paying off debt. Your first goal for this category should be to save for your emergency fund. Most financial experts recommend saving three to six months of living expenses for an emergency fund. Having an emergency fund could help you from going further into debt when you need to pay for an unexpected expense. To grow your savings, open a savings account and set up a direct deposit, save your windfalls, and finds ways to increase your income.  Once you’ve saved your emergency fund, you can focus on saving for retirement and paying down debt.

Once you’ve paid any minimum loan payments from the 50% needs category, you can use money from this category to pay extra on those loans. The savings category is smaller than the needs and wants categories, but if you can reduce your expenses in those categories, you can add more to the savings category.

Here’s an example of how the 50-30-20 budget works.

Monthly after-tax income = $3,000
50% Needs Category = $1,500 (to spend on must-haves)
30% Wants Category = $900 (to spend on nice-to-haves)
20% Savings Category = $600 (for savings and debt reduction)

Pros of the 50-30-20 Budget

  • It offers a simple way to manage your money.
  • It’s suitable for budgeting for the first time and for those who may find budgeting a challenge.
  • The budget is flexible. It allows you to easily see where you can cut expenses and adjust the needs and wants categories.
  • It allows for fun money.
  • It makes savings a priority.
  • There’s less tracking and monitoring of your spending.
  • It’s better than not having a plan at all.
  • If this percentage breakdown doesn’t work for you, you can always make changes to one that works best for you.

Cons of the 50-30-20 Budget

  • It doesn’t provide as much structure for tracking your expenses. Suppose you want to know exactly where every penny is spent. In that case, another budgeting method, such as the zero-based budget may be a better option.
  • You could easily overspend with this method because of the amount allocated for wants. Allocating 30% for non-essentials is a significant amount compared to 20% savings.

Many budgeting methods will help you manage your money and reach your financial goals. The key to sticking with a budget is finding one that works best for you. The 50-30-20 budget is flexible and easy to follow, especially if you’re budgeting for the first time or want an easier way to budget. Get started today and be on your way to financial freedom.


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