What is the 50/30/20 Budgeting Method? 

Personal Finance

Creating and sticking to a budget is foundational to your financial success. Proper money management can help you enjoy guilt-free financial splurges without sacrificing long-term goals, such as homeownership or early retirement. But balancing essential expenses, savings, and lifestyle spending is often easier said than done. 

An effective approach for new and seasoned budgeters is the 50/30/20 method. By following three simple guidelines, you can save for the future, prepare for unexpected costs, and indulge in discretionary spending with zero financial remorse.     

Read on to learn how to set yourself up for financial success by creating a 50/30/20 budget. 

What Is 50/30/20 Budgeting?

The 50/30/20 budgeting method is a framework for managing money that helps you live within your means while building a secure financial future. It encourages users to divide their net (take-home, after-tax) income into three categories: 50% for needs, 30% for wants, and 20% for savings.

  • Needs include expenses necessary for day-to-day living, such as housing costs, groceries, insurance, and minimum required loan payments. 
  • Wants are optional expenses that make life more enjoyable, such as dining out, concert tickets, travel, and shopping adventures.
  • Savings ensure you have funds set aside for unexpected expenses and retirement. Money set aside for this category can also be used to pay more than the minimum required amount on loans and credit cards, allowing you to become debt-free sooner. 

This approach helps direct your income without needing to figure out complicated calculations. 

Benefits of 50/30/20 Budgeting

The 50/30/20 method remains popular with those new to budgeting and experienced savers. It might be due to the way it encourages users to:

  • Set realistic spending boundaries.
  • Prioritize paying off student loans or other debts. 
  • Treat themselves while also working toward financial goals.
  • Establish a regular savings habit for long-term financial stability. 

Individuals and families who use this method often spend less time paying bills and managing other financial obligations. If users stick to the basic percentages, they can realize the benefits of living within their means. 

Other Considerations when Creating a Budget

The 50/30/20 budget is ideal for many but not for all. Households with large amounts of debt, low income, or inconsistent earnings might have difficulty following these percentages. Fortunately, this method allows you to adjust the formula for your situation while benefiting from its basic structure.

Creating a 50/30/20 Budget

You can establish your own 50/30/20 budget in three easy steps. 

Step 1: Decide what you’ll use to track your income and expenses. No fancy equipment or complicated spreadsheets are needed; you can use a budgeting app, such as Digital Banking’s Spending Activity Tool, or a simple notepad and pencil. 

Step 2: Calculate your monthly take-home pay. This is your after-tax income. For many people, it’s the total amount received from their employer for all paydays within a month. 

Step 3: Identify expenses. Gather recent bills, bank statements, receipts, etc. Separate expenses and recent spending into must-haves (needs), like-to-haves (wants), and financial goals (savings).

Here’s an example of what a 50/30/20 budget might look like in practice.

Jason’s take-home pay is $5,000. His 50/30/20 monthly budget might look like this:

Needs (50%): $2,500 

Rent: $1,500

Utilities: $100

Groceries: $250

Loans: $500

Renter’s/car insurance: $150

Wants (30%): $1,500 

Dining out: $500

Entertainment: $500

Hobbies: $250

Clothing: $250

Savings and debt repayment (20%): $1,000

Emergency fund: $200

Retirement savings: $200

Extra payment to reduce loan balance: $600

If Jason would like to pay off his loans sooner, he could reduce his “wants” percentage to allow for more money to go toward savings. 

Build Your Budget with Help from Connexus 

Need more help with personal finances, tackling debt, or creating a budget? Find more resources like this article in the Personal Finance section of the Connexus blog.

You can also check out the rest of our helpful content to learn more about debt management, financial security, and more.