What is the 50-20-30 budgeting rule?

Are you struggling to learn how to start a budget? You’re not alone. Finding the best way to manage your money can be challenging.

Good news: You can create a budget without giving up all the things you love. In fact, those ultra-strict budgets may result in people giving up on budgeting altogether.

One way to learn how to start a budget and make it easy to manage is with the 50-20-30 rule, a favorite among budgeting beginners.

What is the 50-20-30 budgeting rule? And how do you use it? Check out our guide below:

The 50-20-30 rule works by breaking your spending into three key categories. Forget writing down dozens of different expenses. You don’t have to stress about having a specific budget for “clothing” or “entertainment,” for example. As long as your discretionary spending falls within the amount you’ve allotted, you’re solidly on budget.

When you start a budget with the 50-20-30 rule, your three budget categories will look like this:

• Living expenses – 50%: This category includes essentials that you need to pay each month. Think rent, transportation, utilities and food.

• Savings and investments – 20%: This portion of your budget includes money you are putting toward your financial goals, like your emergency fund or retirement account. If you’re paying down any debt, it would also be included here.

• Discretionary spending – 30%: This part of your budget is for anything you want but wouldn’t say you need. It would cover all your non-necessities, such as entertainment and travel.

The 50-20-30 rule can work for those just learning how to start a budget. It can provide a simple and realistic approach to budgeting.

Now that we’ve answered the question, “What is the 50-20-30 budgeting rule?” you might be wondering how to put it into practice.

As with any kind of budget, the key is to have a clear picture of your current finances. You need to know how much money you bring in each month, which means looking at your paycheck and adding any money you make on the side.

If you’re self-employed or your monthly income is variable, you can work from an average monthly figure—simply take your income from last year and divide it by 12. When you budget with the 50-20-30 rule, keep in mind that you need to focus on your after-tax income, which is what’s left of your paycheck after taxes have been taken out.

To start a budget with the 50-20-30 rule, you’ll then need to figure out your monthly expenses. Look at your bank and credit card statements from the last three to four months. Track every cent you spent, whether it was on rent, your gym membership or an ice cream from your favorite shop.

You can do this manually with a pen and paper, create a spreadsheet, or use a budgeting and spending app. By looking at your expenses for previous months, you’ll have an idea of what you spend on a regular monthly basis.

With every dollar and cent accounted for, you’ll need to organize each expense transaction into one of the three categories. When you are learning how to start a budget, it’s okay if you don’t hit the 50-20-30 ratio right away. You can adjust your spending over time and eventually work up to it.

For instance, if you start budgeting with the 50-20-30 rule and find that your living expenses take up more than 50% of your budget, you may be able to gradually start making changes to bring those expenses down. And if gas is eating into your transportation costs and you live in an area with public transportation, you may be able to lower those costs by taking public transportation more regularly. If your grocery budget is accounting for more of your family’s living expenses than you thought, searching for coupons and special deals may help.

As you build momentum, you can look toward more long-term solutions, which could include bringing down housing costs with a new apartment or by refinancing, or replacing an old loan with one that you can better afford.

If you’re budgeting with the 50-20-30 rule and find your non-essential spending is taking up more than 30% of your budget, you can look for ways to save on everyday expenses. For example: packing leftovers for lunch instead of eating out or bringing your own snacks the next time you head to the movie theater.

What is the 50-20-30 budgeting rule best for? It can help you get your finances in order with a simple system for managing your money.

By focusing on only three categories, you can simplify the process and make budgeting feel less intense—which is especially important if you’re learning how to start a budget for the first time. Since the 50-20-30 rule helps you understand how to break down and categorize your expenses, it can highlight areas where you could be saving more.

If you start a budget with the 50-20-30 rule, it can help tell you if you’re spending more than you can really afford, particularly on living expenses and necessities.

Whether you’re saving for a house, looking to reduce your debt or planning a once-in-a-lifetime vacation, budgeting with the 50-20-30 rule can help you prioritize your goals and take steps to achieve them. 

To help make these goals a reality, you may consider opening a high interest rate savings account. Growing your savings with an online savings account can help increase the impact of this simple yet powerful budgeting rule.

So, what is the 50-20-30 budgeting rule? The 50-20-30 budgeting rule can help you create a simple plan for managing your money by dividing your income into three categories: needs, savings and wants. 

While everyone’s financial situation is different, this guideline can provide a helpful starting point for building a budget that works for your goals:

• Allocate 50% of your income toward essential expenses like housing, groceries and utilities.

• Use 20% for savings, investments or paying down debt to help strengthen your financial future.

• Reserve 30% for spending on things like entertainment, hobbies and dining out.