50/30/20 Budget Rule: Your Guide to Less Money Stress

Why this Article Matters

The 50/30/20 budget rule is a simple budgeting framework that slices your monthly after-tax income into three main categories: 50% for needs, 30% for wants, and 20% for savings and debt.

Sound inflexible? Maybe you're struggling to save 5% of your income, let alone 20%. And inflation? Don't get us started.

But hear us out. 50/30/20 is not a strict mandate to handcuff yourself with impossible goals, but more common sense guidelines that challenge you to think about money the right way.

And when you tweak those guidelines to fit your life, it'll improve spending habits and helps you reach your financial goals.

In the next few minutes, you'll learn everything you need to know about the 50/30/20 budgeting rule.

PS - Digital Ledger auto-sorts all three buckets. Grab a free trial now. No credit card required (Sign-up HERE).

You'll love this guide if you...

• are new to budgeting or keep blowing yours up.
• need a way to help control nonessential/discretionary spending.
• enjoy managing your money through the use of budget categories.
• want a free 50/30/20 budget calculator.

What This Article Is Not About

• Envelope budgeting method.
• How to save money, but we have a guide for savings basics here.
• Cutting expenses.

Let’s dive in!

What is the 50/30/20 Budget Rule?

The 50/30/20 budget rule is a popular budgeting method that helps you manage money without feeling like a penny-pinching weirdo. If you're interested, here is Investopedia's article on the 50/30/20 rule (source).

For now, let's forget about the 50/30/20 breakdown and just focus on the main categories.

Needs (essential expenses)

If you can't live without it, it belongs here. Basically, the bills that keep a roof over your head, the lights on, and food in the fridge count as needs. (And maybe coffee. That can be our little secret.)

These are the must-haves in your budget aka living expenses.  

Examples of expenses

Common examples include:

• rent or mortgage payments
• utilities
• groceries
• transportation costs
• insurance premiums
• child care

Other examples exist in a more grey area. While not essential every month, basic clothing needs and minimum debt payments are other categories you could put under needs. But some people opt to put these under wants or savings/debt when required.

Habit hack: if you do put minimum debt payments under needs, then you can always add extra payments to savings/debt to track those separately.

Wants (nonessential expenses)

This is where the fun money lives. Basically, anything that you can live without indefinitely.

These are the nice-to-haves in your budget aka discretionary spending.

Examples of expenses

Think:

• eating out
• streaming services
• the latest gadget upgrade
• tickets to concerts or sports events
• new clothes beyond the basics
• gym memberships
• your hobby supplies
• vacation to Hawaii

If it’s not essential for survival and work, it’s likely a want. Subscribe to Netflix or Spotify? That’s a want (sorry, not sorry). Buying a fancy latte or the premium “extra avocado” option? Also wants.

Savings & Debt Repayment

This is paying your future self. Money in this category is all about securing your financial security, achieving future goals, and knocking out debt.

Savings of some kind are a must-have.

Examples of expenses

In this bucket, you’ll:

• put money in a savings account or 401(k)/IRA
• build emergency funds
• fund other retirement accounts
• save for investments
• pay off student loans
• make debt payments

Also, if you’re saving for a big financial goal, like a house down payment, a new car, starting a business, that fits here too.

Why Use the 50/30/20 Budget?

Here are some big benefits of this budgeting method:

How to Implement the 50/30/20 Budget Method

50/30/20 is our budgeting method of choice, so you have a rock solid system for implementation. You can follow these steps with confidence:

1. Find Your Net Monthly Income

First, you need the spending limit of our monthly budget.

There are several different options depending on what you want to track but you'll settle on the two most straightforward.

Option A: your net income = whatever amount of money hits your checking account. This is most likely the direct deposits from your employer.

This is the simplest and most straightforward way to get started. And you won't need to track any automatic deductions from your paycheck.

Option B: your net income = your income after taxes. Essentially, subtract just taxes from your gross income, but not other automatic deductions.

For example, if your employer deducts things like health insurance premiums or 401(k) contributions from your paycheck, add those back in for budgeting purposes.

Why? Because those deductions can be a part of your needs and savings/debt budget.

For example, if $100 for health insurance is taken out, count that $100 in your needs category. If $200 for your retirement contributions, then add that to your savings/debt category.

Finding your net income pro tips:

• Go with option A if...
  
  • you're brand new to budgeting.
  • your deductions are small or fixed.
  • managing your cash flow is a top priority. In other words, you're living paycheck to paycheck and you're more focused on actual spending.  

• Choose option B if...
  
  • you want the most accurate picture of your finances possible.
  • you have large payroll deductions or they change often.
  • you use a financial advisor.  
  • you're optimizing for your savings contributions.
  • you want to utilize zero-based budgeting with the 50/30/20 rule.
  • If you choose option B, this will help you compare things like competing job offers better.

2. Calculate the 50/30/20 Numbers (or whatever percentages fit your lifestyle)

Once, you have your net monthly income, then you can calculate your allocations for monthly spending. You can do this math yourself, use a spreadsheet, a budget app, or our handy 50/30/20 calculator below.

Looking at a simple example, if your monthly take-home pay is $4,000, your target budget would be $2,000 for needs, $1,200 for wants, and $800 for savings/debt.

Side note - there are more samples below for different lifestyles.

Calculating initial budget pro tips:

• Think of your initial percentages as targets, which can be adjusted later. Don't overthink it.
• Round to easy numbers so you're not trying to align your spending to multiple decimal points.
• You can shortcut this process by signing up for Digital Ledger and any other budgeting app and linking your accounts.

3. Track and List Your Monthly Expenses

Next, log your actual expenses under each category for at least a typical month. 3 months is better. This step is a reality check you’re seeing where your money currently goes.

You might use a budgeting app or pen-and-paper for this. The goal is to write down everything you spend money on and categorize each item as a need, want, or savings/debt, then compare your current spending with your chosen category targets.

Tracking monthly expenses pro tips:

• Try to include irregular spending, like annual subscriptions.
• Add a miscellaneous buffer of 1-2% under the wants category for unanticipated expenses.
• We may be biased (of course we are), but we think Digital Ledger is the best budget app for tracking monthly expenses using any variation of the 50/30/20 rule. You can try it yourself for 30 days, free. No credit card required (Sign-up HERE).

4. Adjust to Meet Your 50/30/20 Targets (or whatever percentages fit your lifestyle)

So let's say you find your percentages aren't where you want them... like your needs are actually 70% or your wants are 50%.

First, don't panic. This is perfectly normal and this is the information you need to be successful in the future.

Second, you need to set realistic goals, so reevaluate your spending and adjust your budget plan going forward to be more in line with reality. Even if it's a temporary adjustment.

Because if you start with targets you can't hit, you'll never stick to them long-term. You'll be building a habit of failure instead of success.

Third, start finding areas to cut or reduce spending to align with your long-term financial goals.  

Adjusting the 50/30/ rule pro tips:

• Do not skip this first feedback loop. Set targets -> measure -> adjust.
• When looking to cut spending, you should usually start with wants.
• Be careful when cutting in the needs category, it's never as straightforward.
• Even if you reduce your savings target or you're focused on debt repayment, still save some amount each month to build the habit. Even it's only $5.
• Pay yourself first. Automate any savings.  
• See our 3-Step Playbook on How to Save Money for more habit hacks for cutting low hanging fruit in the wants category.

5. Adopt Continuous Feedback Loops

Life isn’t static and budgets aren’t either. Plan to revisit your 50/30/20 budget periodically (say, every month or two, and whenever you have a big income or expense change).

And remember, the key is to maintain the spirit of the 50/30/20 rule even if the exact percentages fluctuate. Consistency over time is what counts. So stick with the general strategy and you’ll see results.

Now, let’s put this into practice with a concrete example and a handy table.

Continuous feedback loops pro tips:

• If you have specific goals in mind for targets that are different than your current percentages, try adjusting by 1% every month. For example, if you're reducing monthly expenses in wants, then reduce that spending by 1% each month.
• Revisit after major life events. Like moving, job changes, new baby, or paid off debt.
• Evaluate all recurring monthly payments on a regular basis.
• Redirect unexpected income directly into savings. Like tax refunds, bonuses, or extra paycheck months.

Making It Your Own: Adapting the 50/30/20 Rule

Here’s the secret: flexibility is the key. Every person’s life is different, and a cookie-cutter approach might not fit you but that’s okay!

And isn't that just life? Nothing works right out-of-the-box for everyone all the time. Not diets, exercises, products, advice, etc.

The 50/30/20 rule can (and should) be adapted to suit your situation. It's a feature, not a flaw.

Consider 50/30/20 the starting template for building the habit of looking at money the right way. Which is with intentional balance: you’re mindful of covering needs, limiting optional wants, and saving something for the future.  

With that said, here are some examples of scenarios where you might want to adjust the 50/30/20 percentages.

You have a large family or live in a high cost of living area (think high rent):

You're chasing financial independence, retire early (FIRE):

Want to come up your own breakdown? Use our free 50/30/20 rule calculator.

50/30/20 + Zero-Based Budget: Better Together?

Zero-based budgeting adds what 50/30/20 lacks, and it's detailed categories that are embedded within your needs, wants, and savings/debt.

In fact, they complement each other nicely. Think of 50/30/20 as the high-level strategy and zero-based budgeting as the tactical implementation.

Here’s how they work together:

• Start with 50/30/20 as a Guideline: Use the 50/30/20 rule to decide how much of your income to allot to Needs, Wants, and Savings/debt. This gives you a big picture strategy.
• Use Zero-Based Budgeting to Allocate Every Dollar: Now, within those broad buckets, assign every dollar a job (this is the zero-based part). Let's say you make $5k per month, you would do something similar to the following:
  
  • You break down the Needs category into specifics: e.g. $1,200 to rent, $300 to groceries, $100 to utilities, $150 to car payment, $100 to insurance, $50 to prescriptions, etc., until the whole $2,500 (for needs) is captured.
  • Do the same for Wants (split that $1,500 among your fun stuff categories like eating out, entertainment, shopping – you can even create an “Misc Fun” category to catch small impulse buys).
  • And allocate your Savings/Debt too: e.g. $500 to emergency fund, $300 to extra debt payments, $200 to investment account. By the end, every dollar of your $5k income is allocated into a sub-category of needs, wants, or savings.

Using both budgeting systems, you get the best of both worlds and they make budgeting both flexible and comprehensive.

The 50/30/20 rule ensures you’re not overspending in any major area and keeps the intentional balance between necessities, enjoyment, and future financial security.

And you're able to track budget progress seamlessly month to month at glance. We all have a lot on our minds and diving into the details every time you look at budget can be exhausting. It is a lot easier to know when wants as a whole is off track, then you can dive deeper if needed.

Meanwhile, zero-based budgeting ensures precision when you need it most. Need to cut spending or reallocate some money? Now you know exactly where your money is going.

Together, these methods ensure your budget is both strategic and accountable.

Using zero-based budgeting pro tips:

• Cap any categories within needs, wants, or savings/debt at ~15. Too many buckets will be overwhelming and ultimately get confusing.
• Add minimum and maximums to categories that can fluctuate.
• Have a buffer category for unexpected expenses.
• Review whether your needs, wants, or savings/debt are on track weekly.
• Reconcile and review your detailed budget when planning a big purchase or you're starting to get off track.
• You can use Digital Ledger to help with the tracking so it’s not too tedious.

Start Today!

Budgeting isn’t about perfection. It’s about progress. The 50/30/20 budget rule lets you pay bills, enjoy today, and build tomorrow without spreadsheets that make your eyes bleed. Test-drive it for at least 30 days and watch your habit change in real time.

And if you ever need help, sign up for Digital Ledger to track expenses automatically, slotting them into your personalized 50/30/20 buckets. Your 30-day free trial is one click away. The future you (the one chilling with a healthy bank account) will be glad you did (Sign-up HERE)!

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