50/30/20 budgeting rule: use [Instructions + Calculator]
The 50/30/20 rule (also known as the 50/20/30 rule) is a budgeting method that you can use to align your spending with your savings goals. Budgets shouldn't just be about paying your bills on time. With the right budget, you can determine how much and what to spend on.
The 50/30/20 rule can be a great tool for diversifying your financial profile, achieving dynamic savings goals, and promoting overall financial health.
50/30/20 budget calculator
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In this post, we'll walk you through the steps of budgeting using the 50/30/20 approach so you can learn how to set up a budget that is sustainable, effective and simple. Use the links below to navigate or read through and get all of our tips on budgeting the 50/30/20 method:
What is the 50/30/20 budgeting rule?
The 50/30/20 budgeting rule popular by Senator Elizabeth Warren and her daughter – also known as the 50/20/30 budgeting rule – divides after-tax income into three different areas:
- Essentials (50%)
- Wishes (30%)
- Savings (20%)
Essentials: 50% of your income
To adhere to this rule, you shouldn't set aside more than half your income for the absolute necessities of your life. This might seem like a high percentage (and at 50% it is), but when you look at everything that falls into that category, it makes a little more sense.
Your major expenses are those that you would almost certainly have to pay for, regardless of where you lived, where you worked, or what your future plans are. In general, these expenses are nearly the same for everyone and include:
- Transportation costs
- Utility bills
The percentage allows you to adjust the budget while maintaining a solid, balanced budget. And remember, it's more about the total than the cost of the items. For example, some people live in areas with high rents but can walk to work, while others have much lower housing costs, but transportation is far more expensive.
Wishes: 30% of your income
The second category that can make the biggest difference in your budget is unnecessary spending that improves your lifestyle. Some financial experts consider this category to be entirely discretionary, but in modern society many of these so-called luxury goods have been given a rather mandatory status. It all depends on what you want in life and what you are willing to sacrifice.
These personal lifestyle expenses include things like: your cell phone plan, cable bills, and trips to the coffee shop. If you travel a lot or work on the go, your cell phone tariff is likely a necessity rather than a luxury. You have some wiggle room, however, as you can choose the level of service you are paying for. Other components of this category include gym membership, weekend getaways, and dining with friends. Only you can decide which of your expenses can be called "personal" and which are really mandatory. Much like no more than 50 percent of your income should be used for essential expenses, a maximum of 30 percent should be spent on personal decisions. The less costs you have in this category, the more progress you will make in paying off debt and securing your future.
Savings: 20% of your income
The next step is to spend 20% of your take home salary on savings. These include savings plans, retirement accounts, debt payments, and rainy day allowances – things that you should add but that wouldn't endanger your life or leave you homeless if you didn't. It's a bit too easy, but hopefully you get the point. This category of expenses should only be paid for after your essentials are done and before you even think about anything in the final category of personal expenses.
Think of this as your "getting ahead" category. While 50% (or less) of your income is the goal for essentials, 20% – or more – should be your goal when it comes to commitments. You will pay off your debt faster and make greater strides towards a frustration-free future by devoting as much of your income as possible to this category.
The term "retirement" may not be urgent when you are only 24, but it is sure to become more urgent in the decades to come. Remember, the advantage of starting early is that the longer you let this fund grow, the longer you will earn compound interest.
Establishing good habits will take a lifetime. You don't need a high income to follow the principles of the 50/30/20 rule. anyone can. Because this is a percentage system, the same proportions apply regardless of whether you deserve a system Starting salary and live in a studio apartment or if you are years in your career and about to buy your first home.
A note of caution: Try not to take this rule too literally. The proportions are solid, but your life is different from others. This plan gives you a framework in which to work. Once you've reviewed your income and expenses and determined what's important and what isn't, you can create a budget that will help you get the most of your money. Years from now, you can still use the same guidelines to help your budget develop better than your life.
Ask yourself: Why is a 50/30/20 budget required?
According to Consumer.govThere are many different reasons people start on a budget:
- Save for a big expense like a home, car, or vacation
- Put a security deposit on an apartment
- Reduce spending habits
- Improving creditworthiness
- Eliminate debt
- To break the paycheck to paycheck cycle
Identify the reason for this you are Budgeting using the 50/30/20 method can help you stay motivated and come up with a better plan to help you achieve your goal. It's like the "eye on the price" mentality. When you are tempted to pamper yourself, you can use your overall goal to get back to your saving senses. So ask yourself: why am I starting to budget? What do I want to achieve?
Also, whenever you are saving for something in particular, try to get an accurate number so you can regularly evaluate whether or not your budget is on track during the week, month, or year.
Budget with the 50/30/20 rule
To get the most out of this budgeting method, do the following:
Immerse yourself in your current spending habits
Before you implement a 50/30/20 budget, take a long, close look in the mirror (or perhaps rather your wallet). We're talking about analyzing your spending habits. Do you spend too much on clothes? Shoes? Eat? Beverages? By figuring out how to manage your spending from the start, you'll learn how to use a 50/30/20 budget that can effectively cut your spending down where you need it most.
Look at your account and credit card statements for the past few months and see if you can find common trends. If you find that you are spending too much money on food and drink, think about how you can avoid this scenario. Cook dinner at home beforehand, enjoy potluck with friends, and find happy hour deals around town. There are many ways to budget and save money without affecting your social life.
Pro tip: Using mints easy budget categorizationyou can find out where you can save unnecessary costs.
Identify irregular high ticket costs in the "Wants" category
Of course, there are issues in life that we just cannot avoid. You may need to repair your vehicle or you may have to pay a down payment on a house over the next six months. Often this bills are necessary expenses, so you need to include them in your budget.
When you present your budget for 5/30/2020, take a moment to read your calendar so you can plan for these expenses and adjust your expenses in the time before and after the expenses arise.
Add up all income
Totaling your income is an important first step in learning how to budget your money according to the 50/30/20 rule. However, it's not always as simple as it sounds. Depending on your job, you might have a relatively stable paycheck or one that fluctuates from month to month. If the latter, then collect your paychecks for the past six months and find the average income between them.
Is the 50/30/20 budget right for you?
The 50/30/20 budget isn't the only option. Other popular methods are:
- Zero sum: The principle of the zero sum budget is that you must allocate every dollar you earn to a specific spending, savings, debt, or disposable income account. This style can help avoid unnecessary spending as you know exactly how much to spend on which items.
- Handling budgeting: Swiping your card left and right is easy – but you can't succumb to the temptation with the envelope method. Instead of using your card to spend, you use a set amount of money as your spending pool, nothing more.
Choosing a budgeting style that is right for you depends on a variety of factors. There is no one-size-fits-all approach to budgeting and saving money. That said, the 50/30/20 is usually a simple but effective option to get started on your budgeting journey.
Main takeaways: Budgeting according to the 50/30/20 rule
Here are the main principles of the 50/30/20 budgeting rule:
- This budget rule is an easy way to help you meet your financial goals
- This budgeting method calls for you to spend no more than 50% of your after-tax income on needs
- The remaining after-tax income should be split between 30% wishes or “lifestyle” purchases and 20% savings or debt payments
Mint has budgeting software and a helpful budgeting calculator that will make you just live by the 50/30/20 rule (or a budget that suits your lifestyle) so you can enjoy life to the fullest. After just a little time figuring out which of your expenses fall into which category, you can create your first budget and track it every day. And when your situation undoubtedly changes, Mint lets you adapt so your budget can change with you.
Sign up for your free account today, create your budget for 5/30/20 and make this the year you lay a solid foundation for your future.