What’s all the talk about the budget 50 30 20 rule for personal finance and paying off debt? It gives you 3 main categories to break your expenses into Needs 50%, Wants 30%, and the Saving rule 20%. It’s a framework to build your budget.
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These budget categories are % of your after-tax income with possibly a few adjustments depending on what is payroll deducted.
So, let’s dig a little deeper.
Overall View of 50 30 20 Rule
This is the income after tax and possibly a few adjustments made.
According to this method, it is the amount of pay after taxes (federal and state). If you have deductions such as retirement, health insurance, life insurance, or other insurance, these must be added back.
To calculate the number to use in the calculation:
- Start with the amount of the check that you get paid. It can be from work, alimony, child support, etc.
- Add back any insurances your employer takes out. Example – health, life, disability insurance premiums, retirement, etc. Note – add back if this is payroll deducted. It’s possible to pay some of these types of expenses yourself – don’t add them back if you pay them directly.
Child Support $100
Work paycheck – $2,000 amount of check, $250 Retirement and $400 health insurance premiums taken out of check
+Child Support $100
+ Work $2,000
+ Retirement $250
+ Health insurance premiums $400
Total $2,750 after-tax income with the adjustments. In this article when after-tax income is referenced, it includes any adjustments that may be needed as this example walks through.
The $2,750 is what the % of needs, wants, and savings will be based on.
What if taxes aren’t taken out of your check? Estimate them based on previous tax returns or do the best you can.
What if your pay varies from month to month? Just do your best. This is just to use as a guide to see where opportunities are.
Free Budget Templates
This is a great template to budget with. Budgeting helps reduce stress since you have a plan to manage your money. Download yours today by clicking here.
Expenses – 50% Needs Rule
Monthly rent or mortgage
Utilities – electricity, water, sewer, gas, garbage
The minimum payment on a debt
Expenses – 30% Wants Rule
Expenses – 20% Savings Rule
Additional payments towards paying off debt
Drop your expenses into each category.
Remember the retirement $250 and health insurance premiums $400 in our example above? These will need to go into a category too.
Don’t know what your expenses are or where to get them?
Use these resources to capture them.
If there are special occasions like birthdays and holidays, you’ll need to include these.
Use this to calculate how much you spend by category. There aren’t details, but it will give you somewhere to start.
Credit Card Statements
This is great for breaking down the credit card payments you located on the bank statement. A lot of times the statements will be broken down in some categories already. It’s not perfect because, at Walmart, you can buy groceries, clothes, etc.
A spending log will help you track your expenses to get a better picture of what you spend. We know the bills for our mortgage or rent, the electric bill, cable, and maybe the groceries, but it is the little expenses that often make a bigger impact than we realize.
For electricity and gas bills, we know we’ll have to figure out what to budget for a month, but we have a good history to look at to make that determination.
Without a spending log, we may not have a good indication of how much we spend on cold drinks, snacks, eating out, etc.
Completing a spending log is very time consuming and boring, but the longer you can do this, the better you’ll understand where your money is being spent. I recommend tracking for a month, but if that is too long, I would do a minimum of a week or two.
Understanding the 50 30 20 Rule
This is just a rule of thumb to give you something to start with. In the end, your budget needs to fit your needs.
What’s good about this 50 30 20 Rule method is that it can show if the house payment (rent or mortgage) is too big for your amount you are bringing home. The same with a car payment or any other items.
Many times, we reduce our wants down to save money, but a great deal of the big expenses in our budget falls under the Needs category. If our Needs category ends up being 90% compared to the guide of 50%, you can focus on that area.
There are different budgeting percentages monthly to guide you. There is the 50/30/20 rule budgeting method as well as the Dave Ramsey budgeting percentages.
Guidance helps by knowing how much of a house note or rent is recommended. In the 50/30/20 rule budgeting method, this is how it would work.
Example of the 50 30 20 Rule
Take home pay after taxes and adjustments for the month is $3,500
$1,750 is 50% for Needs ($3,500 x .50)
$1,050 is 30% for Wants ($3,500 x .30)
$700 is 20% for Savings ($3,500 x .20)
In this example, the housing expense (mortgage or rent) should be less than $1,750 because this amount must cover housing expense, utilities, insurance, and groceries.
If your basic needs are too high compared to your after-tax income, it can cause more stress in making ends meet. While these are needs, the values that can be attached to each of these can widely vary. This is where these % as a guide comes in handy to stay in check with practices that’s worked for others.
If you find that the Needs section of what is defined here take up more than 50% of your after-tax pay, then you need to think about reducing something in this category. It could be that your car note is way too high in proportion to what your after-tax pay is. Maybe it’s our house note or rent that’s high. If this is the case, then reducing some of the expenses you can control like groceries or clothing, may not be enough.
It might mean that you need to get a cheaper car to reduce the monthly payment. It may mean downsizing your house or apartment to reduce your monthly bill.
50 30 20 Budget Tips
Some expenses like clothing and groceries can fall into the Needs and Wants. You need very basic items to survive, but you don’t need a new purse or those designer jeans. You don’t have to buy Filet mignon steak or Lobster either.
This is not a perfect calculation; you’ll have to make assumptions as to what category each expense falls into. You’ll also have to estimate what some of your numbers are like utilities or maybe income if this varies.
Do the best you can with what you have. It’s a great way to check your finance’s pulse.
Once you calculate where your expenses are, if they don’t fall within the 50%, 30%, or 20%, make the necessary adjustments.
The 50 30 20 rule will help identify what needs to be done with expenses so that you can have money available to pay off debts, buy a car, etc.
The book “All Your Worth: The Ultimate Lifetime Money Plan” by Elizabeth Warren and Amelia Warren Tyagi goes through how to interpret different % ranges of Needs, Wants, and Saving. I like how it has several self-tests to start the process of drilling down why we spend money on certain things. Mindset is big when dealing with finances. The book also walks you through how to work with your partner on finances. There are tips on how to handle money arguments with your partner too. You’ll find so much more in this book to help you pay the bills, debt, and still be able to enjoy life.
Reducing Expenses Tips
Need ideas on where to look to reduce expenses? Check out this article on How to Find Money with Reduce Utility Expenses where it offers suggestions of what can reduce these expenses.
Another good article is How to Meal Plan for Beginners on a Budget. Meal planning is a great money saver and ultimately saves time too if you stop at the store multiple times a week trying to find something to make for dinner.
Increasing your take-home pay is another way to adjust. You can get a second job to help.
Holidays are fun, but they can put a hurt on the budget. Consider other options instead of buying a gift for everyone. For Valentine’s, you can give cute paper coupons for things simple like getting the remote control, doing their chores, etc. My family loved these! You can get a free printable here at Frugal Ways to Celebrate Valentine’s Day at Home.
At Christmas, suggest to the group you exchange gifts with to do something different like a White Elephant Game or Gift Exchange Game. This is where each person that wants to participate brings one gift. Honestly, others will probably be happy you suggested this. Learn more about it and get a free printable of the Gift Exchange Game here in this article How to Reduce Expenses with Fun Gift Exchanges.
More Money Tips
Be aware that when you buy some purchases like a car or house, the lender may base what you can typically afford from your salary. The problem with this is that they don’t know what all your other financial commitments are already. They don’t know what your financial goals are either. These other variables are very important and so you need to decide what is best for you based on parameters you follow.
Savings should be a routine expense each month. It is necessary to have this money to pay down debt and save for the future. Unfortunately, many times, we’re just trying to make ends meet and pay the bills. There may not be any extra money hanging around to put here. We must make the hard decisions about where we can cut back other expenses to fund savings too. Perhaps you can set this up automatically to go into your savings account or similar. Once you’ve taken the steps to save money, don’t dip into the savings if possible. Your future self will thank you later!
Retirement like 401K that is set up through payroll is a great way to save because you don’t have to make that choice each pay period what to do with that money. It is automatically taken out.
Give the 50/30/20 rule budget method a try or at least do a comparison of where these expenses are in your budget. It may help give insight as to where there may be opportunities to look for in reducing expenses or increasing your pay via a second job.