The 50/30/20 Budgeting Method
Budgeting can seem overwhelming, but the 50/30/20 method makes it easy to manage your finances and stay on track with your financial goals. This budgeting approach has gained popularity because it's straightforward, adaptable, and works for various lifestyles. In this blog post, I'll explain how to set up and use the 50/30/20 method, why it's popular, and who would benefit from this approach.
What is the 50/30/20 Budgeting Method?
The 50/30/20 method is a budgeting framework that divides your after-tax income into three categories: needs, wants, and savings/debt repayment. The goal is to allocate your income in a balanced way, ensuring you cover essential expenses, enjoy some discretionary spending, and save for the future.
Here's how it works:
50% for Needs: This portion covers your essential living expenses, such as rent or mortgage, utilities, groceries, transportation, insurance, and other necessary bills. The key is to ensure these basic needs do not exceed 50% of your after-tax income.
30% for Wants: This category includes discretionary spending, like dining out, entertainment, travel, and other non-essential expenses. It allows you to enjoy life while maintaining financial discipline. Aim to keep this spending within 30% of your income.
20% for Savings/Debt Repayment: This portion is for saving and investing, as well as paying down debt. It includes contributions to retirement accounts, emergency funds, or other long-term savings, as well as extra payments on credit cards or loans.
Why is the 50/30/20 Method So Popular?
The 50/30/20 method is popular because it's simple and flexible. It provides a clear structure for managing your money without getting into complex calculations or tracking every penny. Here are a few reasons why this method resonates with so many people:
Balance: The method balances essential expenses with discretionary spending, allowing you to enjoy life while staying on track with your financial goals. It doesn't feel restrictive, making it easier to stick to over time.
Flexibility: The 50/30/20 method can be adapted to various income levels and lifestyles. Whether you're just starting your career or nearing retirement, this approach provides a flexible framework that suits different financial situations.
Focus on Savings: By allocating 20% of your income to savings and debt repayment, the method encourages healthy financial habits. It helps you build an emergency fund, save for retirement, and pay down debt—all of which are crucial for long-term financial security.
How Have We Used It?
When Siobhan and I first started budgeting in our late 20s (I know, we should’ve started much earlier!), this is the method that we used to help us get started. I found it to be a super helpful tool to figure out if my spending and saving was on track (spoiler alert: it wasn’t!), and it helped me make important decisions about my living situation to help bring down my spending and increase my debt pay-off. Nowadays, we both still use this method as a check-in a few times a year to make sure we’re not overspending on our wants and that our needs spending hasn’t increased beyond the 30%.
How to Set Up and Use the 50/30/20 Method
Here's a step-by-step guide to help you set up and use the 50/30/20 budgeting method:
Calculate Your After-Tax Income: Determine your monthly income after taxes and other deductions. This is the amount you'll use to divide into the three categories.
Determine Your Needs: List all your essential expenses, such as rent or mortgage, utilities, groceries, transportation, insurance, and other necessary bills. Calculate the total and ensure it doesn't exceed 50% of your after-tax income.
Identify Your Wants: List your discretionary spending, like dining out, entertainment, travel, and other non-essential expenses. Calculate the total and ensure it's within 30% of your income.
Allocate for Savings/Debt Repayment: Determine how much you're saving or investing each month, including contributions to retirement accounts, emergency funds, and extra payments on credit cards or loans. Ensure this category accounts for at least 20% of your income.
Adjust and Rebalance: If any category exceeds its limit, look for ways to adjust. Consider cutting back on discretionary spending or finding ways to reduce essential expenses. Rebalance as needed to stay within the 50/30/20 structure.
KEY TAKEAWAYS:
The 50/30/20 method offers a simple framework for budgeting that can be adapted to various income levels and lifestyles.
It balances essential expenses with discretionary spending, allowing you to enjoy life while saving for the future.
By allocating 20% of your income to savings and debt repayment, the method encourages healthy financial habits and helps you build a secure financial future.
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
