The 50/30/20 Rule: Is it the Best Budget for you?

Today I want to start with a question.

What is one of the most universally advised practices that so few people actually do?

Think for a minute.

Budgeting.

Nearly every living person recognizes the value in creating a budget. Everyone knows how important they are to saving money. Retirement experts, financial advisors, and money bloggers all hype up the value in creating a budget. They are the key to paying down debt, saving for your goals, and investing for future-you.

I honestly can’t think of many other life skills that are more important for 20-30 years olds to learn.

If we all know this to be true, then why do most people refuse to do it?

What is it about budgeting that makes people run for hills?

Here are 3 reasons that people avoid making a budget

1. Budgets are constricting. There’s no way around this one. Budgeting forces people to make sacrifices and to say no to things they want.
2. Budgets reveal our financial weakness. The reality is that many people would rather bury their head in the sand than confront their financial situation. They know they are struggling, up to their eyeballs in debt, and living paycheck to paycheck. The first step towards making progress is recognizing where you stand, but this is often the hardest.
3. Budgeting requires hard work. Creating a budget is simple, but sticking to a budget takes hard work. Who wants to spend precious free time keeping track of receipts and plugging expenses in? No one!

At the end of the day the most effective budget is not what you can put together on paper or in an excel doc.

The most effective budget is the one you will actually put into practice.

What is the 50/30/20 rule?

The 50/30/20 rule is a simple method to creating a budget. All of your money you bring in each month gets divided into only 3 buckets: needs, wants, and savings. The beauty of this budget is in its simplicity.

So how does the 50/20/30 budget work?

• 50% of your after-tax income goes towards needs
• 30% is allocated to wants
• 20% (everything left) goes into savings

4 Steps to Creating your Own 50/30/20 Budget

Step 1: Figure out After-tax Income

The first step in putting together your own 50/30/20 budget is figuring out your after-tax income. This is the amount of money that you actually take-home each month after paying out

How do you figure this out?

Let’s say we have a new college grad making $45,000 a year. This number would be your gross income, but that is not the amount that actually hits your bank account each month.

The easiest way to figure out your after-tax income is to check your bank account and see what the direct deposit amount is. As long as your employer is withholding the right amount from each paycheck, you won’t get hit with a massive tax bill in April.

If you’ve already started contributing to retirement accounts like a 401k, 403B, or IRA, then add that amount to your after-tax income. We’ll come back to those accounts later.

If you still aren’t sure, use this nifty tax calculator to figure out how much you can expect to pay each year. You can even have fun plugging in different states or countries to see how your taxes would change.

If you are self-employed, finding out your after-tax income gets a little more difficult to figure out, especially if you have variable income. As a self-employed person, you don’t have an employer setting aside your taxes which puts the burden on you. You are also responsible for paying your This year I actually technically became self-employed even though I work for someone else and this guide was super helpful to figure out my self employment taxes.

Credit Karma Guide to Self-Employment Taxes

Once you know your after-tax income, you have your starting point.

Step 2: Limit your Needs to 50% of Take-home Pay

This next step is arguably the hardest. Now that you know how much you are bringing home each month, you have to find a way to limit your needs to only be 50% of this number.

The key here though is distinguishing between your needs and your wants. This number might seem incredibly low to truly be living on, but you’ll get to add a few things back in at the end in your “wants” section.

This number needs to cover all of life’s basic necessities such as:

• Rent
• Groceries
• Utilities
• Prescriptions / Medicine
• Health insurance
• Car insurance
• Basic phone service (RepublicWireless, ProjectFi)
• Minimum debt payments
• Car maintenance

Anything you can reasonably live without is not a need.

Here are some resources to help you spend less on monthly necessities:
46 Easy & Cheap Meal Prep Recipes (all $2 or less per meal)
150 Proven Ways to Save Money

Your needs section also has to include any minimums you have to make for paying back any debt. So if you have a $300 monthly car payment, this would be a required payment and be classified as a need. Any minimums you owe on credit cards should also be included here.

However, any extra money you are using to pay your debt off early is not technically a need (although you need to be doing that!). Debt payoff will fall into our last section.

Step 3: Identify your Wants

The third step in following the 50/30/20 rule is to make sure all of your wants are only 30% of your budget. On the surface, this might seem like living large, but we’ve still got some standard budget items that aren’t absolute needs.

I’ll be honest. This is probably the most difficult part in implementing the 50/30/20 rule. The reality is that way too many people have the wrong mindset about wants and needs. Usually when people think of “wants,” they immediately think of things like vacations, traveling the world, or buying swanky new clothes.  

The problem is that your “wants” bucket has to cover budget items that probably seem like everyday things: cable, wifi, eating out, gifts for weddings and family, your cell phone bill, and any other non “absolute essentials.”

Step 4: Savings and Debt Repayment

The last step in our 50/30/20 budget is to allocate all of our remaining income to monthly savings. The money in this category can and should be put into a handful of different “savings buckets” based on your needs and priorities.

Two priorities that should be on the top of your list no matter where you’re at are 1) becoming free of any high-interest consumer debt and 2) establishing an emergency fund.

The sooner you can become debt free, the more cash you have available every month to put towards other goals. The emergency fund is critical because it enables you to avoid taking on additional debt in case of life emergencies.

Other savings buckets you might want to consider are a downpayment for a house, setting up a 529 for your kids’ college fund, and of course, saving for retirement.

Who is the 50/30/20 Budget good for?

The 50/30/20 budget is a great way to get started on making a budget. It’s a minimalist approach that doesn’t too much effort to stick to.

If you’re new to budgeting, this may be the right type of budget for you. It’s easy to put together and one of the easiest types of budgets to stick to.

Many of your expenses are going to be fixed such as rent, utilities and any regular spending that you have. As long as you can keep your variable expenses such as groceries, eating out, and entertainment in check then the 50/30/30 rule of thumb is a great way to budget.

With all of this being said, there are a few weaknesses to the 50/30/20 rule.

3 Weaknesses of the 50/30/20 Budget

The 50/30/20 budget is great for many people, but it’s good to be aware of some of the weaknesses before you make a budget yourself.

1. Difficult for low income

The reality is that for many people, especially low income earners, saving 20% of your income is going to be tough as hell to hit. It might even be impossible at first.

The hope is that over time, with hundreds of small improvements, you can work yourself into a better financial situation. You may have to hustle, find some side gigs, and do everything you can to boost your income. But if you can slowly pay off your debt, you’ll have more cash each month to hit your goals.

It’s good to remember though that the 50/30/20 budget is just a rule of thumb to aim for. Nothing more than that.

2. Lifestyle inflation is built in

This is one of my biggest issues with the 50/30/20 rule of thumb. Let’s say that you’re successful at creating a budget that fits this method. You’re saving a solid 20% of your income, and then you change jobs, get a promotion, or find a side gig to bring in some extra income.

What do you do with that extra cash?

According to the 50/30/20 budget, you would split it up accordingly. This doesn’t make sense to me though because it’s not like your needs suddenly grew? I definitely get rewarding yourself for success and celebrating wins in life like a promotion.

Why not funnel the vast majority of your increased income into savings or debt payoff?

The point here is that the 50/30/20 budget does not scale well as your income increases. It expects your needs and wants to inflate over time.

3. Saving 20% of your income may not be enough

I’ll be straight with you… This is really only a weakness if you’re a fairly high-income earner or DINKS (dual income, no kids).

Saving 20% of your income may not be aggressive enough to work on all of your financial goals. Paying off student loans, getting out of credit card debt, saving for retirement, a house downpayment, or your kids’ college.

All of these take a significant amount of savings and 20% of your income won’t be enough to do it all.

Big Fat Takeaway

The best budget is the one you’ll actually stick to. The 50/30/20 budget is a fantastic place to start if you’re trying to learn how to budget. It’ll get your financial snowball rolling in the right direction and over time you can work on increasing your savings to a higher percentage of income.

Join me in the comments!

Have you tried the 50/30/20 budget before? What was your experience like?
Do you see any other pro’s or cons to this kind of budgeting system?