The 50-30-20 rule is a simple but robust budgeting strategy. We created a 50-30-20 budget template for you to create your own budget based around needs, wants, and savings.

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. 

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.

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.

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.

Man sitting in home office working on a laptop in front of a window.

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 know where your paycheck is going. Calculate your after-tax income using this calculator.

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.

Interior of a well lit apartment with a TV, couch, and chic decor.

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 spouse.

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.

Woman carrying shopping bags.

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.

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. Your 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 built a simple template for you to use to start your own 50-30-20 budget. 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.

Download Our 50-30-20 Budget Template

We designed a budgeting template you can download on Google Sheets. Create a copy to your own files and enter your budgeting specifics. We pre-filled needs, wants, and savings goals of the most common budgeting items.

50/30/20 Budget Template Overview

Download Our 50-30-20 Budget Template

50-30-20 Budgeting in Action

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.

The average American salary is $40,000 per year for a millennial. After taxes and medicare are taken out, that leaves about $2,700 per month in income. This obviously depends on where you live.

Again, use this free income tax calculator to estimate your take-home pay based on where you live. Every state has different income tax rates.

With this income, you can afford to have your needs be $1,350 per month. Your wants should be $810 per month and your savings will be $540 per month.

Budgeting Your Needs

To make sure your needs category stays on track, your rent will likely be around $800 per month. Then, health insurance, car payments, and utilities will make up the remaining $550. This adds up to your total of $1,350.

Finding an affordable house can be tricky. If you have a partner, you can split the cost of rent of a more desirable place. Or try to find roommates to lower the cost. Unfortunately, it’s very difficult for most Americans to afford their own apartment.

Similarly, if your car payment is in line with the American average of $400 per month, it might be time to downsize. A smaller car payment can do wonders for your budget. Employer-sponsored health insurance can also bring your needs down.

Two young women drinking coffee at home at a white table.

Budgeting Your Wants

Next, it’s time to look at your wants category. You have a full $810 per month for this category, but it will add up quickly.

Your cell phone bill, internet, and cable bills all likely add up to $200 per month. Add in subscription services like a gym membership and Netflix and you’ll quickly add another $100 to your total.

The remaining $510 will cover eating out, traveling to see friends and family, and updating your wardrobe. Most Americans spend about $250 per month eating out.

Savings and Debt

Finally, your remaining $540 will go towards paying down debt. Start by saving first. If possible, try to save about 10% of your monthly take-home pay. In this case, 10% of $2,700 is $270. 

That leaves another $270 for contributing to your retirement or paying down debt. In many cases, it makes sense to pay down high-interest rate debt first before investing.

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. 

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. 

What budgeting strategies do you use in your own personal life?

50/30/20 Budget Calculator

Visualize how you would allocate your dollars with this budgeting method