How to Make a Budget Using the 50/20/30 Budgeting Rule

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Budgets are more than just paying your bills on time—a budget is also about determining how much you should be spending, and on what. They’re a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health. The 50/20/30 rule, also called the 50/30/20 budget, is one budget type that can help you keep your spending in alignment with your savings goals.

In this post, we’re taking you through the steps of budgeting so that you can learn how to set up a budget that’s sustainable, effective, and simple. Plus, we’re taking a deep dive into the 50/20/30 approach to show you how the method applies to budgeting in real life. 

Use the links below to navigate, or read all the way through to absorb all of our tips on how to budget and save money.

Ask Yourself: Why is a Budget Necessary?

According to Consumer.gov, there are plenty of different reasons why people start a budget:

  • To save up for a large expense such as a house, car, or vacation
  • Put a security deposit on an apartment
  • To reduce spending habits
  • To improve credit score 
  • To eliminate debt
  • To break the paycheck to paycheck cycle

Identifying the reason why you’re budgeting can help you stay motivated and create a better plan to reach your goal. It’s kind of like the “eye on the prize” mentality. If you’re tempted to splurge, you can use your overarching goal to bring you back to your saving senses. So ask yourself: why am I starting to budget? What do I want to achieve? 

Additionally, if you’re saving up for something specific, try to determine an exact number so that you can regularly evaluate whether or not your budget is on track throughout the week, month, or year.

Deep Dive Into Your Current Spending Habits

Before we can show you how to budget efficiently, it’s time for you to take a long, hard look in the mirror (or maybe your wallet, rather). We’re talking about analyzing your spending habits. Do you overspend on clothes? Shoes? Food? Drinks? Figuring out your spending vice from the very beginning will help you learn how to make a budget that effectively cuts spending where you need it most.

Take a look at your bank and credit card statements over the last few months and see if you can find any common trends. If you find that you’re overspending on going out for food and drinks, come up with a plan for how you can avoid this scenario. Cook dinner at home before, have a potluck with friends, find happy hour specials around town. There are plenty of ways to budget and save money without compromising your social life.

ProTip: Using Mint’s easy budget categorization, you can identify where you can cut back on unnecessary expenses.

Identify Irregular Large Ticket Expenses

Of course, there are expenses in life that we simply can’t avoid. Maybe you need to make a repair on your vehicle, or perhaps you’re putting a down payment on a house in the next six months. Oftentimes these bills are necessary expenses, so you’ll have to factor them into your budget.

When you’re coming up with your budget, take a moment to look at your calendar so that you can plan for these expenses and adjust your spending in the time before and after you incur the expense.

Add Up All Income

Totalling your income is a big part in learning how to budget your money, but it’s not always as simple as it sounds. Depending on your job, you might have a relatively steady paycheck or one that fluctuates from month to month. If the latter is the case, collect your paychecks from the last six months and find the average income between them. 

Decide on a Type of Budget

Our final step in learning how to budget and save money is to find a budgeting style that makes sense for you. There are plenty of budgets to choose from, including:

 

  • Zero-sum: The principle of the zero-sum budget is that you must allocate each and every dollar you earn toward a specific expense, savings account, debt, or disposable income account. This style can help deter unnecessary spending because you’ll know exactly how much you have to spend on what items.   
  • Envelope budgeting: Swiping your card left and right is easy—but the envelope method doesn’t let you succumb to this temptation. Rather than using your card to spend you use a predetermined amount of cash as your spending pool, nothing more. 
  • 50/20/30: The 50/20/30 budgeting tip is a highly organized way to organize your spending habits. 50% of your income goes toward essential expenditures, 20% goes to savings, and 30% goes to personal lifestyle items.

 

Choosing a budgeting style that works for you depends on a variety of factors; there’s no one-size-fits-all approach to budgeting and saving money. That said, let’s take a closer look at the 50/20/30 style as an example.

The 50/20/30 Budgeting Rule

Essentials: 50% of your income

To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. This might seem like a high percentage (and, at 50 percent, it is), but once you consider everything that falls into this category it begins to make a bit more sense.

To be clear, your essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include housing, food, transportation costs and utility bills. The percentage lets you adjust, while still maintaining a sound, balanced budget. And remember, it’s more about the total sum than individual costs. For instance, some people live in high-rent areas, yet can walk to work, while others enjoy much lower housing costs, but transportation is far more expensive.

Savings: 20% of your income

The next step is to dedicate 20 percent of your take-home pay toward savings. This includes savings plans, debt payments and rainy-day funds—things you should add to, but which wouldn’t endanger your life or leave you homeless if you didn’t. That’s a bit of an oversimplification, but hopefully you get the gist. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.

Think of this as your “get ahead” category. Whereas 50 percent (or less) of your income is the goal for essentials, 20 percent—or more—should be your goal as far as obligations are concerned. You’ll pay off debt quicker, and make more significant strides toward a frustration-free future by devoting as much of your income as you can to this category.

The term “retirement” might not carry a sense of urgency when you’re only 24 years old, but it certainly will become more pressing in decades to come. Just keep in mind the advantage of starting early is you will earn compounding interest the longer you let this fund grow.

Personal: 30% of your income

The last category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life, and what you’re willing to sacrifice. The reason that this category accounts for a larger percentage than your savings is because so many things falls into it.

These personal lifestyle expenses include items such as your cell phone plan, cable bill and trips to the coffee shop. If you travel extensively or work on-the-go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for. Other components of this category include gym memberships, weekend trips and dining out with your friends. Only you can decide which of your expenses can be designated as “personal,” and which ones are truly obligatory. Similar to how no more than 50 percent of your income should go toward essential expenses, 30 percent is the maximum amount you should spend on personal choices. The fewer costs you have in this category, the more progress you’ll make paying down debt and securing your future.

Establishing good habits will last a lifetime. You don’t need a high income to follow the tenets of the 50/20/30 rule; anyone can do it. Since this is a percentage-based system, the same proportions apply whether you’re earning an entry-level salary and living in a studio apartment, or if you’re years into your career and about to buy your first home.

A note of caution, though: Try not to take this rule too literally. The proportions are sound, but your life is unlike anyone else’s. What this plan does is provide a framework for you to work within. Once you review your income and expenses, and determine what’s essential and what’s not, only then you can create a budget that helps you make the most of your money. Years from now, you can still fall back on the same guidelines to help your budget evolve as your life does.

Main Takeaways: How to Budget

Mint offers budgeting software that makes it easy to live in accordance with the 50/20/30 rule (or any budget that suits your lifestyle) so that you can live life to its fullest. After spending just a little bit of time determining which of your expenses fall into which category, you can create your very first budget and keep track of it every day. And when your situation undoubtedly changes, Mint lets you adjust so your budget can change with you.

Sign up for your free account today, and make this the year you build a strong foundation for your future.

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Comments (67) Leave your comment

  1. Concise, practical, and well said!! Thank you for writing this article and not making it so lengthy that it became cumbersome . I was encouraged to create my own budget and see what happens.

    1. where are your credit cards? you can also do 10 savings more savings into the 50 cut it to 40 and less personal like cut back 10% do not eat out cook for a change wash your own clothes exercise at home for at least six months. If you keep the eye on the prize that is what you should do car pool if you can and electricity bills will go down if you turn your lights off and even unplug everything when you leave even your refrigerator if is only for less than 8 hrs. Ask for assistance for electricity in the cityhall of your town so you are looking at and additional 30% savings because if you start saving or putting money aside your savings what is the bank going to give you as savings 2% and your bills specially credit cards that will charge you up the 29.00 % why in the world would you want to have money in the bank when you are in dept? you it to pay off your crap and the you can save.

  2. I use Mint to track my expenditures but I wish it allowed users to group budget categories under “essential,” “personal,” and “savings.” It is useful to know that I spend X on “beauty” and Y on “wining and dining” but unless the app can sum those as a percentage of my calculated monthly “personal” budget, I’m not gaining as much information as I would hope to…

    1. I think the app doesn’t have this option but when you open Mint on the web you can edit, add, and modify the categories and subcategories.

    2. I do find it ironic that Mint’s tool doesn’t even have the functionality to instrument their own advice.

    3. You can set up MINT to do this for you. Create new categories of Essential, Personal and Savings. Then put your expenses under those categories: Rent goes under Essential, Restaurants goes under Personal, etc. Then your budgets will show you your spending by these categories.

    1. a hold lot of crap this 50/30/20 when you lost a hand of your expenses just pay your rent electricity and then you pay your credit cards that money the 30 pay off your credit cards one you are done than save. tink about 29.99 against 2.00 or even 4% in the bank is no match. pay your bills first and brake or cut those credit cards so not call to cancel them just use the once a year so that companies do not cancel them remember that if you cancel the credit cards your credit score your be impacted

  3. If I have 5 credit cards and pay them all off, should I close 3? If I close 3 will this negatively effect my credit score?

    1. Yes it will negatively effect your credit. Instituition look at your ioverall credit lines available to you and factor those limits into your credit worthy score….( a trick of mine…20plus years! ) is to rotate which card I use dependinging on opening statement and closing statement date. If I want to make a purchase, I look at the ” closing date ” of my three cards to see which will put off the bill due date furthest away. That way it falls into the billing cycle date for the next month. Ex: my chase closes on the 3rd of may… if I wait to purchase tile the 4th it will be two months before that bill is due. Does that make sense?

    2. Yes, it definitely will. Although it is best not to owe anything on any cards, closing cards will negatively affect your score for two reasons. 1) they will no longer contribute to your “average age of credit”, and 2) they will reduce your available credit which means that any balance you owe on any accounts will be a larger % of your total available credit. The best idea is to pay off all accounts, and close none of them.

  4. The old fashioned rule was ten percent of your income goes into savings first. Then you must manage on the rest. I found this easiest to do when the employer takes the ten percent first and puts it into a pension plan. Some employers also have matching funds, and it is wise to take advantage of that if possible.

  5. I work in the 401k industry. 1 out of 3 participate in it. Some even pass out on their employers match (free $). 20% seems a bit high but would certainly be nice to do so.

  6. hey guys. u are great but why dont you have a service for Turkey.I live in Istanbul and sound not possible to get benefit of your software here in Turkey!!

  7. This should be implemented in your Mint software. Based on categories, it wouldn’t be difficult to do.

  8. Not an easy task to maintain while living in NYC the most expensive state in the US of A but with perseverance anything is possible.

  9. Thank you, Liz Warren for popularizing this method. Surprised you didn’t mention her in your post, she details this personal finance strategy in her 2005 book All Your Worth.

  10. Shrink you essentials and increase your savings. For example, our mortgage is 6% of our household income because we didn’t “upgrade” as our income increased. Other idea’s – we lived for free for many of our younger years by buying a 4 Plex and living in one of the units. Don’t have a big (or any) car payment. This allows your savings to grow faster as you divert more money this way. I will retire in my late 50’s with about $2.5M in investments and we don’t make doctor or lawyer money. At a minimum, do what this article says an save at least 20%. More is better, of course.

  11. I love this rule and learned so much about implementing it from Elisabeth Warren’s book: all your worth. Thanks for bringing the topic up.

  12. Now where would you classify tithing? I am a devout member of my religion and I tithe a full 10% of my income. I personally do net although I know others that do gross. Would charitable contributions fall under personal (as it is a personal choice) or Essential (as I always try to pay tithing first and will always pay, even if I was pan handling on the streets)? I could even see making an argument for Savings, as if you pay now, the Lord will care for you later; but I do not interpret the Lord’s love for us in that way.

  13. Good post. When you say “take home” you mean net pay after any pre-tax deductions? Also for “savings” are you including any pre-tax retirement savings in that 20% or saying 20% in addition to pre-tax savings.

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