June 2, 2022
A Simple Equation to Make Budgeting Easier
The 50/30/20 budget rule is a simple tool that can help guide your monthly spending and saving decisions. And forget about a complex spreadsheet filled with lots of calculations—all you need is your after-tax income and a calculator.
It’s a popular way to create a monthly budget that’s easy to remember and, ideally, just as easy to stick with over time. The idea is to split up your monthly after-tax income into three categories: 50% goes to needs, 30% to wants and 20% to savings or paying off debt.*
More a rule of thumb than a strict rule, this budget plan does allow for some wiggle room so you can make tweaks depending on your financial situation. And this template can be a helpful tool for tracking where your money goes each month so you can stay on top of your financial goals.
Here’s what you need to know:
Monthly after-tax income. This is your take-home pay each month after taxes have been deducted. If retirement plan contributions, healthcare premiums and any other automatic payments are taken out of your paycheck, allocate those amounts to one of the three buckets below.
Needs: 50% of your income. The 50/30/20 budget suggests that half of your monthly income should go toward necessities—or the bills you absolutely must pay each month. This portion of your budget will cover your housing expenses (be it rent or a mortgage), groceries, car payments and gas, utilities, insurance, healthcare, childcare costs and loan payments.
Wants: 30% of your income. This category includes things you want but don’t necessarily need. Think: entertainment, travel, dining out and shopping splurges, to name a few ways you may spend money on things you want. This is the category where you can cut back to free up money for other uses.
Savings and paying off debt: 20% of your income. While this category makes up the smallest portion of your monthly budget, don’t discount its importance. And your financial situation will dictate how you allocate this money. You may want to prioritize building up an emergency fund to cover unexpected expenses down the road, for example, or setting aside money for longer-term goals like buying a house or retirement.
A 50/30/20 budget in action. The equation is meant to serve as a guideline to help you create a budget and get you on track to realizing your financial goals. Consider this: if your after-tax income is $33,000, that means your monthly income is $2,750. The 50/30/20 rule suggests you should set aside $1,375 for necessities, $825 for spending on things you want and the remaining $550 for savings.