The 50/30/20 Budget Rule: A Comprehensive Guide
The 50/30/20 rule is a popular budgeting method that splits your monthly income among three main categories. Here’s how it breaks down:
Monthly after-tax income
Before you can slice up your 50/30/20 budget, you need to calculate your monthly take-home income. This figure is your income after taxes have been deducted. It’s likely you’ll have additional payroll deductions for things like health insurance, 401(k) contributions, or other automatic payments taken from your salary. Don’t subtract those from your gross (before tax) income. If you’ve lumped them in with your taxes, you’ll want to separate them out – subtract only taxes from your gross income.
50% of your income: needs
Necessities are the expenses you can’t avoid. This portion of your budget should cover required costs such as:
- Housing.
- Food.
- Transportation.
- Basic utilities.
- Insurance.
- Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment bucket.
- Child care or other expenses that need to be covered so you can work.
30% of your income: wants
Distinguishing between needs and wants isn’t always easy and can vary from one budget to another. Generally, though, wants are the extras that aren’t essential to living and working. They’re often for fun and may include:
- Monthly subscriptions.
- Travel.
- Entertainment.
- Meals out.
20% of your income: savings and debt
Savings is the amount you sock away to prepare for the future. Devote this chunk of your budget to paying down existing debt and creating a financial cushion. How, exactly, to use this part of your budget depends on your situation, but it will likely include:
- Starting and growing an emergency fund.
- Saving for retirement through a 401(k) and perhaps an individual retirement account.
- Paying off debt, beginning with high-interest accounts like credit cards.
The 50/30/20 budget rule divides take-home income like so: 50% for necessities, 30% for wants, and 20% for savings and debt repayment.
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Get More Help with Monthly Budget Planning
For more budgeting advice, including how to prioritize your savings and debt repayment, review our tips for how to build a budget and utilize our financial calculators. Then, consult our personal finance guide. Not sure how to start budgeting? Downloading a budget app or personal finance software may help, or get informed with a budgeting book. Or become a NerdWallet member for free. We’ll track your spending in one place and identify areas where you can save. Compare NerdWallet vs. Mint, and learn how our app uses the 50/30/20 budget.
