How The 50-30-20 Budget Really Works

50-30-20 Budget

Like many, you might shudder at the word budget. Perhaps it sounds too boring or challenging to figure out? But look at it another way. A budget plans out exactly how you'll use your money and this can be tailored to suit your specific lifestyle and situation. Better still, the 50-30-20 budget proves it doesn't have to be difficult.

If you're looking to simplify your budgeting process or are new to budgeting, then the 50-30-20 budget might be the perfect match. It involves 3 easy steps that will help you prioritize your monthly financial commitments.

The 50-30-20 rule is comprehensive and covers all bases. And don't worry if math isn't your thing because there are calculators out there to help you stay on top of your budgeting strategies.

This article will take a close look at the 50-30-20 budget rule, including what it is and how it works. We'll also explore 50-30-20 budget calculators so you can jump right in and get started immediately.

What is a 50-30-20 budget?

In its simplest form, the 50-30-20 budget rule divides your after-tax income into three distinct buckets, which are:

  • 50% to Needs
  • 30% to Wants
  • 20% to Savings

This plan keeps your finances simple and easy to follow.

How did the 50-30-20 budget start?

U.S. Senator, Elizabeth Warren, came up with the 50-30-20 budget. In a book called All Your Worth: The Ultimate Lifetime Money Plan, Senator Warren described this simple way to budget. And not surprisingly, it has stuck. People love how easy it is to understand and follow!

Why the 50-30-20 rule works

You might be wondering why this budget works. There are a few reasons.

1. Simplicity

Firstly, the budget is really simple. If you're not into details or if you're just starting out, this budget is fail-safe and easy to implement. With it, you only focus on 3 buckets - Needs, Wants, and Savings which are pretty easy to figure out.

2. Every dollar has a purpose

Secondly, it helps you account for every dollar. You start off with your after-tax income, which represents 100% of what you have to work with, and then you work out the different categories from there.

3. Financial goals

Lastly, it can help you save up for large expenses such as a house or car. Alternatively, it can help you pay down debt faster if that's one of your initial goals.

How to use the 50-30-20 rule to create your budget

The 50-30-20 budget rule is very simple. To get started, you need to figure out your after-tax income. This number is simply the amount of money you have left over after taxes are paid. These taxes include federal, state, medicare, and social security.

Note: don't be confused by your gross income, which is the salary you earn before tax deductions have come out. We're looking purely at how much money you have left in your bank account to divide it into your three main categories.

If you want a quick and easy way to figure out your take-home pay, simply look at your paycheck stubs.

If you run your own business, you'll still calculate your after-tax income. All you have to do is take your gross income and subtract your business expenses and any state and federal taxes.

Once you've figured out your after-tax income, the fun begins. It's time to split your income into the 3 categories.

Category 1: 50% Needs

The 50% Needs category is for all your monthly essentials. So, this includes things you simply cannot live without. Include rent or mortgage payments, healthcare, groceries, car payments, utilities, and debt payments.

As you can see, the Needs budgeting category only includes the necessities you need to survive. Do not include entertainment, take-out, or fine dining in this category.

You should be able to comfortably meet your needs with 50% of your monthly income after tax. If you're spending more than this, you may want to re-evaluate.

Are you paying too much in rent? Are you spending more on transport than you can afford? Do you spend a large chunk of money on week-day lunches? These are all good questions to ask yourself.

Whatever the case, you can make immediate changes to your spending and improve your 50-30-20 budget. Consider moving to a more affordable home or using public transport to keep costs down. Additionally, you can make lunch at home and bring it to the office.

Category 2: 30% Wants

Wants are all the "nice to haves" that you spend money on. These are items you definitely don't need, but perhaps they give you pleasure. And that's ok! The aim is to keep a detailed budgeting plan, so your spending habits don't get out of control!

The list of Wants is endless and differs from person to person depending on your lifestyle.

For example, your personal list might include going out to the movies, eating in restaurants, buying new electronic gadgets, new handbags, or tickets to a big game. Another person's wants might include cable TV or Netflix subscription, going to concerts, and paying for gym memberships.

Remember: there are many good substitutes for Wants that cost little to nothing. For example, you might want to buy the latest iPhone but can't afford it.

Instead, buy an earlier version, and you'll still get the same benefits. Alternatively, fitness fanatics who can't justify the cost of signing up to the gym could work out at home instead.

There is almost always a cheaper alternative available when you're looking to purchase an item. But feel free to balance your Wants vs. Needs, so you still enjoy some of these activities from time to time.

Wants may sometimes include premium experiences that are beyond reach financially. For example, someone may want a new BMW when they can easily have a Toyota that would cost much less.

Exercise wisdom with your wants, as it can be easy to justify spending if you really want something. The Wants category is often the trickiest to master.

Category 3: 20% Savings

Arguably the most important category in the 50-30-20 budget is the Savings category as this can determine your future. Savings in this case refers to both savings and investments.

Savings can take many forms ranging from your emergency fund to your savings account. They can also include any money market investments you have.

Investments refer to any money you have set aside to generate income. This can include investing in the stock market, purchasing real estate, or setting up your retirement accounts.

Your top priority in this category should be your emergency fund. It is important to have three to six month's worth of living expenses saved in your emergency fund.

Beyond that, focus on your retirement savings. These can include putting money into your company-sponsored 401(K) plan or an IRA. You might look into working with an advisor to set this up.

A quick note on paying down debt

Do you have credit card debt, a personal loan balance, or perhaps student loans to pay back? Debt payments fall across both your Needs and your Savings categories.

Why? The minimum payment you owe on your outstanding debt is a Need in that you must pay it back and on time each month.

But only paying back the minimum amount is a slow and expensive way to tackle your debt. Instead, we recommend contributing to your Savings category, so you save money to pay off your debt faster.

This will go towards the principal and interest, effectively saving you money in paying future interest payments down the road.

50-30-20 budget calculators to check out

Figuring out your 50-30-20 budget doesn't have to be difficult. In fact, it can be as easy as using a simple calculator. Here are some examples of 50-30-20 budget calculators.

Banzai calculator

This Banzai calculator was developed together with Shinhan Bank. You have to enter your post-tax income, and it does the rest for you! You'll easily see how much to allocate to each of the 3 categories.

Mint calculator

The Intuit Mintlife calculator is similar. Simply enter your monthly after-tax income, and the calculator will immediately display how much you have for Needs (labeled Essentials), Wants, and Savings.

DIY spreadsheet

Another option is to set up your own 50-30-20 budget spreadsheet. If you're great with Excel or Google Sheets, you'll enter your post-tax income into a single cell and set up calculations to convert this into corresponding 50%, 30%, and 20% categories.

Leverage the 50-30-20 budget today!

Budgeting doesn't have to be difficult, and the 50-30-20 budget is a great way to achieve your budget goals quickly and easily.

Remember to use your post-tax income as your base and make further calculations from there. Now that you have all the steps in place, go ahead and get started today!

P.S. Here are other budgeting methods to explore. The 80-20 budget, the 60-20-20 budget, the 70-20-10 budget, and the 30-30-30-10 budget!

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