By Cassie Bottorff
Making a budget doesn’t have to be a chore. Take the 50/30/20 rule, which provides a simple budgeting framework: Split your after-tax income into three buckets: 50% for needs, 30% for wants, and 20% for savings. U.S. Senator Elizabeth Warren popularized the rule in her book, “All Your Worth: The Ultimate Lifetime Money Plan.”
Budgeting is a highly personal topic since each person or family has different values and goals. According to Lauren Genuardi, CFP, the chief operating officer at Expressive Wealth, based in Chicago, financial planners understand this fact, which is why many begin the process of building a budget for clients with a 50/30/20 rule analysis.
“According to this rule, half of your budget should go towards living expenses such as rent, transportation, utilities, and food,” says Genuardi. “Then 20% goes to savings and investments , and the remaining 30% covers discretionary spending, such as non-necessities like travel, entertainment, and gym memberships.”
How to create a budget using the 50/30/20 rule
Creating a budget with the 50/30/20 rule isn’t a one-and-done task—it’s part of an ongoing budgeting process. Understand your income, assess your current spending habits, set goals, and then regularly readjust your spending as your circumstances change.
But under the 50/30/20 rule, the proportions of your income that you devote to different priorities remain the same:
- 50% for needs, such as housing, food, transportation, insurance, and minimum debt payments.
- 30% toward wants, like subscriptions, movie tickets, concerts, and travel.
- 20% for savings, including emergency funds, retirement savings, and extra debt payments.
“Anyone who is just getting into budgeting and is looking for simple, high-level rules or guidelines can benefit from using the 50/30/20 rule,” says Jordan Hanson, CFP, a financial planner with Ritholtz Wealth Management. “This rule is best utilized when a budgeter is less focused on the specific line items in their budget and more focused on the big picture.”
Here are four easy steps to get started building your own budget with the 50/30/20 rule.
1. Calculate your after-tax income
Think of your budget like baking a pie. Your first step is to gather your ingredients—that means understanding all of your sources of income.
Fill up your pan by tallying paychecks, whether they be from a regular salary, interest income from investments, or earnings from gig work. Add in additional sources of income such as tips, commissions, or child support.
Next, trim the excess crust. In this case, that means excluding taxes and withholding on your gross income. When that’s done you should have a clear picture of your monthly income.
2. Assess recent spending
Now consider how to divide up the pie by understanding your monthly spending. “Review your expenses from the prior month,” Hanson says. “Then, categorize each expense into one of the three categories—needs, wants and savings.”
Each category will be a slice of the pie. You’ll want to make sure each slice accommodates the 50/30/20 budgeting rule, or else there won’t be enough pie—I mean, money—to go around.
Here are some examples of “need,” “wants,” and “savings” you’ll want to be prepared for:
3. Make a plan of action
At this point, you should know how much after-tax income you’re earning and the expenses you need to cover. Now it’s time for some tough decisions.
Have you been spending far more than 30% of your income on your everyday expenses? Rein those in and make sure each of the three priorities gets enough of the pie.
To this end, you may have to reduce your spending on wants or find places to cut back on needs. Here’s an example of what an analysis might say someone is currently spending:
- After-tax income: $5,000
- Needs: $2,700 (54%)
- Wants: $1,800 (36%)
- Savings: $500 (10%)
In the above scenario, this person is spending too much on their needs and wants, which means they won’t have enough to satisfy the savings part of the rule.
To fix the issue, they should take a critical look at their expenses. Are they paying too much for insurance? Sometimes finding a different provider can result in a lower rate. Perhaps they’re overpaying for a vehicle? Could be time to turn in that pricey car and get something more affordable.
To ensure you’re not spending more than you should in each category, you might try separating your funds into different bank accounts—one for each category, according to Faron Daugs, CFP, a wealth advisor and founder of Harrison Wallace Financial Group.
“This helps to avoid the risk of using funds for wants before the actual household needs are met—which can happen if the budget funds are commingled,” says Daugs.
For your saving, investment, and debt goals, Daugs also recommends separate accounts—ideally with direct deposits. This automates your contributions and helps you avoid using those funds for wants as well.
4. Reassess regularly
Now we’re getting somewhere. The pie has cooled and is sliced into three distinct slices, each one ready to be handed off to its appropriate parties.
Over the course of your first month, you’ll want to watch carefully as expenses start chipping away at those slices. Then, prepare to do it all over again for the next month, making adjustments to your own personal recipe as appropriate. Over time, this will get easier and easier.
“The goal is for you to be able to automate your finances to the point where it doesn’t require you to check in on your budget any more frequently than annually,” says Hanson. “At this point, you would also only reevaluate your budget when a major event happened in your life that resulted in a significant change to your income or expenses.”
The takeaway
The 50/30/20 system can be good for beginners and big-picture budgets, according to experts. But if you’re looking for other options, there are many budgeting strategies to explore, including the envelope system, the pay-yourself-first method, and more.
Budgeting apps like You Need A Budget (YNAB) or Rocket Money can help you check in on your progress, even tracking and categorizing your expenditures for you. The Consumer Financial Protection Bureau (CFPB) also has free, fillable worksheets you can use.
Not ready to bake a budget on your own just yet? Consider consulting a financial professional or credit counselor if you need help choosing the right budgeting strategy for you.
—Cassie Bottorff
Cassie is a staff editor at Fortune covering personal finance. Prior to joining the team at Fortune, Cassie managed editorial teams at Forbes Advisor and Fit Small Business. She obtained her undergraduate degree from Northern Kentucky University and is a certified SCRUM master—and few things bring her more joy than tinkering with a spreadsheet and bending it to her will.
Aly J. Yale contributed to this article.
