What Is The 50/30/20 Budget And How To Use It

Mastering your Finances with the 50/30/20 Budget. 

You’re trying to organise your finances but don’t even know where to start.

What happens when you get your paycheck or allowance?

Have you had an incident where you don’t know where all your money went at the end of the month? It’s stressful at first, I know. 

Calm down.

It’s not a problem.

The whole point of budgeting is to serve you. When you make that mindset shift to how you’re in control, everything is less overwhelming. 

The 50/30/20 budget rule is a popular – and simple – budgeting method that can help individuals achieve financial stability, regardless of whatever level of income they have. 

Because nothing has to be complicated. 

Check out this related post on How to Get out of Debt Quicker – and Don’t Panic.

What is the 50/30/20 Budget?

Simply put: The 50/30/20 budget divides your after-tax income into three categories: needs, wants, and savings.

This method is based on the idea that people should spend 50% of their income on needs, 30% on wants, and 20% on savings.

Initially, the budget was popularized by Elizabeth Warren and Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan.”

They called it the ‘Balanced Money Formula’ because it emphasized the balance between the three categories. 

The authors encourage readers to avoid debt, overspending on wants, and neglecting savings. While this may be common sense and straightforward, sometimes people struggle on their financial quest. We can illuminate some reasons here. 

That’s okay. The 50/30/20 budget is completely simple and easiest to follow. Which is great for newbies and people who want to simplify their tracking. 

Grab your coffee. Put on some Beyonce. Here we go!

How to Use the 50/30/20 Budget

1. Gather your Pot of Gold! 

First, Calculate your after-tax income. This is the hard-earned money you have earned after taxes and other deductions have been taken out. 

Once we have the number we’re working with per month, we can start to divide and conquer (aka budgeting)

2. Budget 50% for Your NEEDS

You’re going to take your after-tax income and cut that in half. This 50% covers all the necessary and essential expenses that you need in life to survive. 

Your needs must never exceed 50% of your income.

This includes things like:

• Housing (rent or mortgage payments)
• Food (Groceries and not eating out)
• Transportation (Car lease and transit costs)
• Basic Utilities
• Health Care
• Childcare
• Alimony
• Loan Payments

It’s very important for you to discern if an expense is truly a necessity (one that helps put a roof over your head) or something else. 

We remember having a friend who claims she ‘cannot survive’ without three-wick candles or Starbucks. We have another friend who would find any reason to justify the top-of-the-line Mercedes with satellite navigation and heated seats. 

Everyone has something to live for and get through the day.

But, I’d argue that this is a very high-end want. 

That’s the tricky bit.

People will often justify their reasoning for buying something after the fact. They will emotionally justify their purchase. This is a slippery slope.

There’s a difference in buying something that feeds your soul and gives you hope, and just addicted to the dopamine kick.

3. Budget 30% for your WANTS

This is where the three-wick candles and Starbucks belong in your budgeting. 

Here is where you let yourself go with a bit more fun because this is where you spend your “fun money” – unapologetically.

Your wants could be:

• Everyday luxuries like Starbucks
• Vacations
• Three-wick Candles
• Saracha Sauce
• Fancy wine and 
• Dining out at restaurants
• Expedited shipping on 
• Online shopping orders
• Spa Day and 
• Manicures and Pedicures

Never feel guilty for using this money that brings you joy.

You’ve assigned your money a job – and this is their purpose. And having a little fun really does motivate you to keep on track with your financial goals. (I love it when a plan comes together.)

You might not be able to afford all of your wants. But you can buy what 30% allocates to you. The key is to whittle down what truly brings you happiness, and what nourishes your soul.

A fun side effect is when this gets built as a habit, quite often you’ll find that you can live without a lot. 

If you really want to maximize your wants, you can always apply little hacks like how I get free Starbucks drinks here. Best of both worlds!

4. Budget 20% for your SAVINGS and DEBT REPAYMENT

After you budget 50% for needs and 30% for wants, what is remaining ought to go to your savings and debt repayment. 

Whereas 50% feeds your living, 30% feeds your soul, the remaining 20% feeds your financial future and peace of mind. And that has equal weight of importance as the other two. 

What is considered part of the 20%?

• Savings (eg. Emergency Fund, College Fund)
• Investment Plans 
• Retirement Savings (401k, Pensions, etc.)
• Debt Repayment (Student loans, credit cards, etc.)

Let’s Paint the Picture with Some Examples

Here are a few examples of how the 50/30/20 budget might look in practice:

• Example 1: If your after-tax income is $4,000 per month, you should allocate $2,000 (50%) towards needs, $1,200 (30%) towards wants, and $800 (20%) towards savings/debt repayment.
  
• Example 2: If your after-tax income is $6,000 per month, you should allocate $3,000 (50%) towards needs, $1,800 (30%) towards wants, and $1,200 (20%) towards savings/debt repayment.
  

Keep a Watchful Eye

Keep vigilant and a watchful eye on where your money is going, especially at the start.

You’ll be more aware of the shiny temptations and not be led astray. Stay strong and resist the over-spending on your Wants. 

Even if you go overboard a few times, don’t worry, we are human. And any new financial habit is skill-building. 

Making the conscious habit of readjusting the allocation is also a skill and not an excuse to give up. Redirect and rebalance as the 50/30/20 rule dictates. 

Remind yourself of your ambitions – whether you’re saving for a downpayment or paying off debt. They will be your guiding stars and extra motivation to keep vigilant.  If you think you need some help to start – here’s an awesome tool for you:

Celebrate your Triumphs and Learn from Defeat

As you go through your budgeting tracking, celebrate every small win and learn from every defeat.

Adjust your budget as needed and don’t be disheartened by the few and occasional financial setbacks.

When there’s a paper trail, you’ll uncover your financial habits. You’ll make better and more informed decisions. 

And Just Remember

By implementing a budget you are worlds away from most!

Under the 50/30/20 budget rule, you effectively allocate your take-home pay into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment. You’ve given each dollar a chore, thus giving you: a balanced allocation of income, a bit of indulgence, and your financial security fortified. 

It also doesn’t have to be the 50/30/20 budget to help keep your life on track – but it is the simplest. Finding one that works for you and your life is critical because we believe that the budget works to serve you – and not the other way around. 

Every financial journey is unique. Yours doesn’t have to be complicated.