The 50/30/20 budgeting rule simplified

If you're a budgeting newbie and you're ready to get started, you can hit the ground running with one simple formula. Good things can happen when you become the boss of your bucks. 

The 50/30/20 rule is a great place to begin. Here's how it works.

What is the 50/30/20 rule?

The 50/30/20 rule means dividing your after-tax pay as follows:

• 50% for needs

• 30% for wants

• 20% for savings

The idea is to prioritize your needs, carve out money for enjoying life, and purposefully save for a better future. Once you get used to it, managing your money with the 50/30/20 plan shouldn't take much extra time or thought.

Breaking down the 50/30/20 rule

Here's where the rubber meets the road—where you determine what goes into each category. 

50% needs

Needs are things you can't live without or things that could have severe consequences in the near future if you stop paying for them. Here's a list of common needs:

• Rent or mortgage payments

• Utilities like electricity, gas, phone, and internet service

• Food, transportation, and childcare

• Car insurance

• Health insurance and medical costs

• Loan payments and minimum payments on credit cards and student loans

• For some people, life insurance

Anything beyond these basics is a want, not a need. 

30% wants

Wants are the upgrades in your life. For example, a restaurant meal, a car you can't afford to buy with cash, a gym membership, streaming subscriptions, and almost all clothing purchases once your closet is stocked. It's okay, even good, to want or have those things. Life would be pretty sad without at least some of them. 

Wants can also be tickets to events, non-work travel, sports equipment, and any other purchase you could reasonably put off or skip. 

Your 50/30/20 budget isn't there to kill the joy in your life. It's there to help you decide which of these pleasures are the most important to you, and to help you manage your budget to include them. 

20% savings

Finally, the rule allocates 20% for savings. Saving today means a more secure and comfortable tomorrow, but there's more to it than that. Your savings can include:

• Contributions to a 401(k) or other retirement account

• Emergency fund

• Money for assets, like the down payment on a home

• Investing in stocks, bonds, or mutual funds

• Repaying debt beyond the minimum required payments

That's right. Paying down debt counts as savings. Because, as financial gurus will tell you, knocking down your debt is one of the most important investments you can make in yourself. 

Read more: 5 ways to pay off credit card debt

How to implement the 50/30/20 rule

Calculate your take-home pay

The first step is to look at your paycheck and determine what's left after your employer withholds for taxes. If your employer automatically deducts retirement contributions, health insurance, or other costs, add that money back to your take-home pay. Those costs are part of your budget.

Calculate your spending categories

Next, multiply the result by .5 for your needs, .3 for your wants, and .2 for your savings. This translates to the 50, 30, and 20 percent, and gives you the size of each bucket in your budget.

Track your spending

If you've been tracking your spending, take a look at how you currently spend your money and how your usual spending style fits in with your new budget. If you haven't been paying attention, start now. There are free, easy-to-use budgeting apps, or you can simply write down what you spend in a notebook, or save your receipts and review them every week for a month or so. 

You probably already know what your needs cost. Your rent or mortgage, utility bills, loan and credit card statements, and food costs are probably already front and center. Don't forget insurance and other non-negotiable expenses like child support payments.

Allocate your savings 

Next, figure out how to direct the money for savings. Prioritize emergency savings until you have a modest amount of cash set aside. A good first goal is $1,000. 

If your employer matches 401(k) contributions, try to max yours out. That match is free money! Note, though, that there are some financial experts who suggest putting retirement savings on hold while you aggressively knock down your debt. So if that's your plan, it's definitely an acceptable option.

Next, check out your debts. Consider a strategy like the debt avalanche or snowball to get rid of your debt and minimize the amount you spend on interest. Once you've rid yourself of that pesky debt, you'll have more money to spend on the things that are most important to you.  

Review and revise

Budgeting isn't a one-and-done exercise, especially in the beginning. You'll want to track your expenses every month and look back to review how you did. If your needs exceeded 50%, why did that happen? Is it a permanent situation or a temporary glitch? What's the plan to get back on track? Did you come in under budget?  What will you do with the extra? 

Benefits of the 50/30/20 rule

The benefits of the 50/30/20 rule can be summed up in one word: balance. The rule provides guardrails, so you can prioritize what you need to live now while remembering to save for the future. And it doesn't leave out affordable upgrades that make life more enjoyable. Or debt repayment, which is at least as important as saving.

Following the 50/30/20 rule can help you improve your financial future, head off problems, and make the most of your money today.

Tips to make the 50/30/20 rule easier

The more you can automate, the easier sticking to your budget is:

• Have your paycheck electronically deposited to your bank. 

• In some cases, you might ask your employer or bank to split it between your checking, savings, and retirement accounts.

• Put your mortgage, rent, and loan payments on autopay or automatic email reminders.

• Use autopay for your credit card minimum payments as well. This helps you protect your credit standing and avoid late charges. 

• Many utility companies offer an equal payment option. You pay the same amount every month year-round, instead of facing higher bills in warmer or colder seasons.

• Prioritize your wants. Decide which ones you can give up when money is tight.

How do you categorize loan payments when using the 50-30-20 rule to budget?

Loan payments are unique. Unlike utility bills or concert tickets, loan payments could fall into more than one budget category. 

Let’s say you’re carrying a credit card balance and want to get it paid off as soon as possible. Your minimum monthly payment is $100, but you can come up with another $100 to get it paid down.

• The $100 for your minimum monthly payment fits into the 50% needs category. Regular payments prevent negative consequences like late fees and dings to your credit score. 

• The extra $100 you could add falls into the 20% savings category. Here’s why: Every extra dollar you pay beyond the minimum goes toward paying down the balance. The faster you reduce the balance, the less interest you’ll pay. Just as retirement contributions or mortgage payments are investments in your future, so is paying down debt. 

Once the debt has been paid off, those funds could be available to invest in different ways, helping to secure your financial future.

Common challenges with the 50/30/20 rule

The 50/30/20 plan is straightforward, but not always easy to do. Here are some common challenges.

Your needs are more than 50% of your income

If your income is lower or you live in an expensive area, 50% might not be enough for your basic needs. High housing costs are often the culprit. The rule can be helpful in bringing this to your attention, and then you can decide what to do about it. 

If you're like many cash-strapped households, you've already cut costs as much as you can. You may need to adjust your percentages, at least temporarily—perhaps to something like a 60/20/20 rule. Brainstorm ways to improve your situation in the long run, and hang in there while you must. Can you increase your earnings? Can you eventually get rid of debt and free up the cash you're spending on payments? 

You're not sure how to balance saving money against debt repayment

Debt repayment is classified as savings under the rule, but there's no guidance that tells you how much to put toward debt reduction and how much to save. 

You may need to balance paying off debt, creating an emergency fund, saving for retirement, and saving for goals. 

Consider this order of priorities: 

1. Save a small emergency fund and max out matching 401(k) or 403(b) contributions at work.

2. Then pay off high-interest debt (such as credit card debt). 

3. After that, split your savings bucket between a fully funded emergency account, retirement, and other goals.

20% isn't enough to cover everything in your savings category

Saving 20% might not be enough for some people. If you're retiring soon and trying to catch up, for instance, 20% might not be adequate. In that case, you might want to count extra savings as a need and budget accordingly. 

30% for wants might be wasteful

Higher earners or dual-income, childless households may not need to spend 30% for wants. In fact, they could short-change their future by doing so. That's because it could cause them to save less while adopting a more extravagant lifestyle. They could end up with higher spending needs and less savings when it's time to retire. 

What’s next

Here are a few steps to take right now. 

• Do you have bank accounts to make your plan work? If not, open them today. 

• When you go to work, ask your payroll department about automatically depositing your check and splitting it between your accounts. 

• Download a budgeting app that can sync with your accounts and make tracking spending easier. Try managing your money with the Achieve MoLO app.