How Do You Do The 50/20/30 Budget Rule - Explained With Examples

There are lots of different budgeting rules that you can use to manage your money, and one of the most popular is the 50/20/30 budget rule. It is likely that you have heard of this rule before, but you might not know exactly what it means.

The 50/20/30 Budget rule requires you to divide your money between three different categories: needs, wants and savings. Every single outgoing payment that you make can be divided between these three categories, so you should budget your money around this. In theory, it is a very straightforward budgeting tool, and once you use it once or twice, you will be flying! 

So, how do you do the 50/20/30 budget rule? Keep on reading to find out! 

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What is the 50/20/30 Budget Rule?

First things first, let’s take a look at what the 50/20/30 budget rule is. As we have said, this budgeting rule requires you to divide your spending between one of three categories: needs, wants, and savings. Each category is assigned a percentage of your income and ultimately, once divided between the three categories, you should end up with zero dollars left in your account.

The largest part of your income should be directed towards needs. These needs should equate to around 50% of your incoming money. Needs will include a variety of different things, from rent/mortgage payments, utility bills, food bills, money spent on essential clothing, healthcare and debt repayments. While food bills are included in the “needs” category, this will not include things such as Starbucks and dining out, it will include essential food. 

Then 30% of your income should be directed towards your wants. This will include non-essential clothing, dining out, sporting events and concerts, high-speed internet, streaming services, and so on. Any “fun” activities, such as socializing with friends or family should also be included in this section. 

Finally, 20% of your income will then be directed towards savings. Savings can range across a variety of different things, from savings accounts to pension payments, and government-supported savings plans too. You could be adding money to a short-term emergency fund or saving for the long-term. It doesn’t matter as long as the money is being saved. 

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How to Use the 50/20/30 Budget Rule 

So, now that we have taken a look at how the 50/20/30 budget rule works, and the principles behind it, let’s take a look at how to use it. To help you out, we’ve put together a few examples of how this would work. 

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Step One – Look at Your Income

First things first, you need to look at your income each month. Some people are on a salary, and this is the only money that they have incoming each month. Others may have side hustles that generate more income on top, and others may have varying amounts of income each month due to working overtime/working multiple jobs. The first thing you need to do is calculate your overall income for the month. 

Once you have your overall income calculated, you can then divide it. The easiest way to do this is to work out what 10% of your monthly income is. So, for example if your monthly income was around $6,000, 10% of this would be $600. 

You can then multiply it by 5 to work out what 50% is, by 2 to work out what 20% is, and by 3 to work out what 30% is. In this case, $3,000 would go towards your needs, $1,200 would go towards your savings, and $1,800 would go towards your wants. 

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Step Two – Divide Your Outgoing Payments

Every month you will have your set outgoing payments. These will mainly consist of bills, but it could also include bills for things that are not considered to be essential. To ensure that you divide your money correctly, you need to be able to categorize all of your monthly outgoings. 

So, in the “needs” category, you will find your mortgage/rent payments, your utility bills, your minimum debt repayments, your food shop expenses, and things such as Wi-Fi, phone contracts, and so on.’

Whereas, some of the bills you may find in your “wants” category would include Netflix or other streaming services, music streaming services, money to spend on alcohol or treats (rather than essential foods), and so on. 

Finally, you will also have some bills that are designated for your savings, such as essential pension contributions, healthcare contributions, and money sent to your emergency fund. 

None of these payments should exceed the percentage dedicated to that category. If your needs exceed 50% of your wages, then you are living beyond your means, and the same goes for your wants and savings too. If you find this happens, then you should adjust the way you live to fit these different budgeting categories. 

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Benefits and Drawbacks of this Budgeting Rule

As you can see, the 50/20/30 budgeting rule is really easy to follow. Once you have calculated the percentages in line with your income, you can easily make changes to ensure that your spending is in line with this budget. 

Benefits

• Simple to Use - This is one of the easiest budgeting rules, and an easy one to follow if you are new to budgeting.

• Learn Good Money Techniques - Following the 50/20/30 budget rule can help instill healthy money techniques that you can use in the future. 

• Realistic - Unlike some budgeting techniques, this rule is very realistic and achievable to use.

Drawbacks

• Lacks Details - This is a basic technique so it doesn’t take into account any details.

• Not Suitable for Everyone - This budgeting technique doesn’t work for everyone as it doesn’t account for overspending/emergencies/etc. 

Summary

In short, the 50/20/30 budget rule is a great one to use if you are new to budgeting. It is simple to follow and straightforward to implement. Find out more about it, including examples, in this guide. 

It's important to carefully review your check stubs to determine whether or not they are up to scratch or not. Our software can create check stubs fast and easily.

Thank you for reading!