A budget is a way to be thoughtful about your spending and saving choices. Most people say that money is a source of stress1, and creating a budget can help reduce that anxiety and frustration by making you feel more in control of your finances.2
Put a method to the madness
There are many budgeting methods out there, but we have a favorite: it’s called the 50/30/20 rule.3
The 50/30/20 method suggests you allocate your income to three categories:
- 50% to needs
- 30% to wants
- 20% to savings and paying off debt.
Needs are things you need to survive: your mortgage, food, healthcare, and things like that.
Wants are discretionary items like TV subscriptions and dining out.
And savings and debt—well, that’s what you save for your goals and pay for what you already owe.
Why 50% for needs? Because 50% is sustainable for the long run, no matter your financial situation. It’s also safe for times when your income may be reduced.
Similarly, 30% for wants gives you the space you deserve to relax and enjoy yourself. This is all about liberation, not deprivation. When you know that it’s okay to spend, then you can really enjoy your money.
And 20%? That’s so you can consistently pay down debt or build a cushion for your big plans and life’s surprises.
So how do I use it?
This is where the 50/30/20 rule really shines. It’s easy to understand and straightforward to use. You don’t need special software. A simple piece of paper or a spreadsheet will do the trick.
Step one, tally your income and expenses
Review your bank statements from the last six months to understand how much you’re earning—from your job, side hustles, investments, etc.—and how much you’re spending in a typical month. That’s the starting point for your budget. What’s coming in, what’s going out?
Then think about next 6-12 months. Are there other spend categories that emerge? Are there big items you want to save up for: a vacation or home renovation? Add those to your budget too, and see where you may need to trim from so you can save for what’s important.
Step two, categorize your expenses
Now, apply the category “need” or “want” to each expense. Groceries, for example, are a need. So is your rent or mortgage. Dining out, on the other hand, would be a want.
Keep an eye out for irregular expenses. Those are the bills that are not due every month, like property taxes or vet bills or surprise repair costs. To track those expenses, add the total cost for the year, then divide by 12. That gives you a number that you can slot into your monthly budget.
A well-crafted monthly budget covers the costs of your needs and wants and uses the remaining money to help you reach your savings goals, like building an emergency fund and saving for retirement.
Step three, compare your budget to the rule
Add up your expenses that are needs. Are you spending close to 50% of your budget? Add up your expenses that are wants. Are you near 30%? And what about the amount you’re paying to savings and debt—how close are you to 20%?
The importance of saving
The 50/30/20 rule is designed to help you be thoughtful about what you spend, so you can be proactive in what you save.
If you’re able, set aside money for an emergency fund to be used in case of job loss, unexpected medical expenses, or any unexpected costs. That kind of buffer is a big deal—nearly 3 in 10 adults are one small financial setback away from not being able to pay their monthly bills.4
Less worry, more confidence
Don’t get too hung up on the exact percentages.
The 50/30/20 rule is a guide to help you build confidence over your finances. If in doubt, cover your needs first, then your debt payments and emergency savings, and finally your high priority wants and future needs.
Budgeting is like a muscle. The more you flex it, the stronger it becomes.
By sticking to your budget, you’ll find that you’re spending less time worrying about where to spend your money, and more time feeling confident that you’ve planned for what you need—and of course, what you want.