The 50-30-20 rule is a simple but robust budgeting strategy, but how to create one? Many people struggle to follow a budget by tracking every dollar that comes in and goes out. The 50-30-20 rule gives a good ballpark of where your finances should be to stay on track financially. The following is an updated article where we walk you through how to create a 50-30-20 budget in 4 easy steps along with a downloadable budget template for you to create your own budget based around needs, wants, and savings.

What Is The 50-20-30 Budget Rule?

50% of your income goes to the most essential bills. 30% goes to things you want and nice-to-haves. Then the remaining 20% goes to paying down debt or saving.

50 20 30 budget

Popularized by Elizabeth Warren in her book All Your Worth, it’s a simple strategy that works surprisingly well. It’s effective at prioritizing your budgeting and building long term wealth.

How Does The 50-30-20 Budget Work?

Now that you understand what the 50, 30, and 20 stand for with this budget rule, it should be easy to put into practice.

The way this type of budget works is you simply calculate your monthly take-home pay (after taxes). Once this is identified, simply use the percentages to calculate a spending threshold for each of the three categories. For example, if your monthly after-tax income is $3,000, then the most you should spend on your “needs” is $1,500 – or 50% of your monthly income.

Once your thresholds are established it’s time to review your expenses and plan your budget accordingly.

How To Create A 50-30-20 Budget In Four Steps

Step 1: Calculating After-Tax Income

The first step to building a working 50-30-20 budget is to figure out your after-tax income.

It’s how much of your paycheck is left after taxes, social security, and medicare expenses are taken out. Usually, your employer will take these out of your paycheck for you. But you should always check if the right amount gets deducted.

Other deductions like health care or your 401k should not be considered. If these are deducted from your paycheck, add them back in for your budget calculations.

Your after-tax income should only include unavoidable payments like taxes. This gives you a full picture of your finances.

After-Tax Income for 1099 Workers and Self-Employed

For 1099 workers or those who are self-employed, the process is similar. Your after-tax income is your gross annual income minus any quarterly taxes you pay. You can also deduct any legitimate expenses from your total income.

The tools you use for your job like your home office or computer are deductible.

Remember that if you’re self-employed your taxes will be higher than if you worked a regular job. In fact, they’re twice as much as if you worked a job that gives you a W-2. This is called the self-employment tax. This handy paycheck calculator lets you calculate your after-tax income which is your budget’s starting point.

50-30-20 Calculator

Once you’ve identified your take home pay, you can use the following calculator that will automatically create spending limits for each of the 3 categories:

50/30/20 Budget Calculator

Visualize how you would allocate your dollars with this budgeting method

Step 2: Determine Your Needs

The pillar of a 50-30-20 budget is determining your needs and wants.

Needs are exactly what they sound like. They are things you need to keep yourself alive and well. They include housing, health insurance, groceries, and car payments.

Your needs shouldn’t account for more than 50% of your total after-tax income.

Needs are hard to categorize, but there are good guidelines for you to use. If you can give something up with just a minor inconvenience in your life, it’s not a need. Things like your health and paying your utilities bill are needs. Going without them would have a big impact on your life.

But if you had to forego buying a new outfit for work or cut out your cable subscription, you’d still be OK.

what do you need as opposed to want

What About Credit Cards?

Credit card debt is tricky with the 50-30-20 budget if you’re new to the strategy. The minimum payment on your credit card is a need. Not paying it results in late fees and damage to your credit score.

But the remaining balance is a want. Let’s say you typically pay $75 per month on your credit card balance. $25 of that likely goes to a minimum payment. Consider this a need.

The remaining $50 isn’t. We’ll talk more about paying down debt later on. For now, only consider minimum payments as part of your needs category.

Step 3: What Are Your Wants?

Next, your wants take up your 30% of your budget. It’s easy to think that your wants include big vacations and a beautiful date night with your partner.

But wants aren’t only for big purchases like this. They primarily include the things in your daily life that make it a bit easier. That includes data for your phone or cable package to watch your favorite shows.

Dining out, shopping, streaming services, and traveling all fall into the wants category.

A sweater to keep you warm during the winter months while you wait for the bus is a need. But buying a new soap dish for your kitchen to keep it organized is a nice-to-have.

Remember, wants are anything that aren’t essential to your daily life.

The rules can be tricky to learn and you have to find what works best for your personal budget.

Step 4: Savings and Paying Down Debt

Finally, let’s talk about savings and paying down your debt. In the 50-30-20 budget, 20% of your budget goes to this category. It’s the smallest amount of your budget but arguably the most important.

You should set aside at least 20% of your after-tax income for bettering your future. This includes money for retirement contributions, savings for a new home or vehicle, or setting money aside for a college savings plan.

For starters, you should put some of your money towards creating or maintaining your emergency fund. Then, if you have debt you can use some of this money to pay it down further. Remember, debts that have minimum monthly payments are considered needs.

Your mortgage and student loans have payments you must make every month. If you’re trying to pay them off faster, you’ll dip into this category to make extra payments.

Something else included in the savings and debt category is retirement contributions; a Roth IRA or company 401k both count. Earlier, we told you not to include your retirement contributions in your take-home-pay.

By only using after-tax income to build your budget, you’ll have part of your money left for retirement contributions. We recommend taking your company’s matching contributions if they offer them! This will help build your retirement fund faster.

50-30-20 Budget Template

We designed the above 50-30-30 budgeting template in Google Sheets for you to use and download for free. Simply click on the image or the orange button below and you will be asked if you’d like to create a copy of our 50-30-20 budget spreadsheet template for your own personal use. 

It includes pre-made categories for needs, wants, and saving and retirement. Be honest about your current monthly spending in each of these categories. Use your credit card and bank statements to get a historical look at how you spend your money.

Don’t worry if you’re not already on track. If you live in cities like San Francisco or New York, your housing expenses may be higher than the rest of the country. In some situations, it’s hard to get your budget to line up perfectly.

After you figure out where you’re currently spending money, you can make adjustments to get on track.

budget spreadsheet template
Make A Copy Of Our 50-30-20 Budget Speadsheet

50-30-20 Budgeting Example

Let’s take a look at a working budget with some real numbers. This will hopefully give you a better idea of where to start with your own budget.

example of 50 20 30 budget

Summary and Tips

The 50-30-20 budget is a simple strategy to get your finances in order. Although it’s easy to explain, putting it into practice can be tricky.

Finding ways to cut down expenses and wrangle your spending isn’t easy. You may have to downsize your car or find a new place to live. Or you may have to bike to work a few days a week to save on gas.

TIP: If you ever need to access your emergency funds, make sure to adjust your budget to focus on replenishing your emergency fund account.

Your budget should adapt to your changing lifestyle and isn’t set in stone. Use your budget to understand your lifestyle and your finances to make smarter decisions.

Hopefully, this article has helped. If it did or you know of other budgeting strategies that have worked for you, let us know in the comments below We’d love to hear from you.

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