Woman putting money into a piggy bank

How to Use the 50/30/20 Budgeting Method

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Have you ever tried and failed to create a budget? You’re not alone because most budgets are too complicated. We should all have a budget, but making one can be a daunting and complex task, especially if everything is broken down into many different categories.

If you want to set up a budget but are worried it will be too complicated or that you’ll have to break down every single purchase, don’t worry. One of the most popular budgets, known as the 50/30/20 budgeting method, is a great way to get started.

The 50/30/20 budget is a tool that can help you work towards your goals and get your finances in order. It’s easy to set up, and it’s one way to help you stay financially organized. 

Everyone’s financial situation is different. Your exact percentage may be different, too. However, these numbers can be a great starting point for you.  

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Woman putting cash into a piggy bank

What is the 50/30/20 Budget?

A 50/30/20 budget is a great way to manage your money. This method divides your after-tax income into three categories: 50% goes to necessities, 30% to wants, and 20% toward savings or paying off debt.

Balancing your expenses is a key to financial success. This budget is easier to follow since you only have to track three categories: needs, wants, and savings. If you can keep your main spending categories in balance, you will be able to spread your money more efficiently. 

These three main categories are enough to keep track of food/personal, transportation/entertainment, and housing/apparel. Spend just a few minutes every month to make sure these three areas are balanced.

The 50/30/20 budget is a much easier way to manage your money. This budget allows you to focus on the big picture instead of every single purchase you make.

Needs: 50%

The first category is needs. Setting aside half of your income for the needs that you have to pay is essential. Some expenses are unavoidable, and we all have them since they are things we can’t live without. The needs category includes expenses such as rent, mortgage, groceries, car payments, healthcare insurance, car insurance, and utilities.

It’s a popular strategy because it allows you to manage your money more efficiently by looking at your overall spending instead of just individual expenses. 

Wants: 30%

The second category includes the expenses you can do without. But are they really? The word “want” is defined as “something one desires but does not need.” It’s the stuff you buy that you could technically live without, like dinner and a movie, a new handbag, concert tickets, vacations, or the latest electronic gadget.

This category also includes things like cell phones, cable bills, and internet service. You can save money by paying for a cheaper cell phone plan, cutting the cable cord, and opting for a less expensive internet plan. 

You can always live without a vacation and the latest tech gadget. But you could not live without food, shelter, and clothing. Therefore, we call these things wants instead of needs. 

It all depends on what you want out of life and what you are willing to give up to get it.

Savings: 20%

The final category is savings. This is where you stash away 20% of your take-home pay toward savings. I don’t mean just a savings account at your local bank when I say savings. This is the money you save for your future. It includes building an emergency fund, saving for a down payment on a home, contributing to your IRA, and making extra payments to pay off your student loans or other debt.

In order to be financially secure, it is essential to put aside 20% of your income for savings. 

Benefits of the 50/30/20 Method

The 50/30/20 budget is a simplified method with several benefits.

1) Helps You Identify Where to Cut Back

You can use the 50/30/20 method as a budgeting tool to identify exactly how much money you’re spending in certain areas and may be inspired to make some adjustments. You’ll be able to identify unnecessary spending on things you don’t need and cut back.

2) Reduces Financial Anxiety

Budgeting can feel overwhelming at first, but it can also relieve financial stress. Instead of worrying about every purchase, you’ll have a budget that allows you to spend freely. By structuring your spending, you’ll know what you can afford to spend.

3) Reduces the Budgeting Process

It’s easier to set up and maintain than a traditional monthly budget because there are only three categories.

4) Helps to Achieve Your Goals

Set aside money before you spend it. This method makes saving your money a goal. A 50/30/20 budget helps you achieve your financial goals like saving for an emergency, buying a house, or saving for retirement.

Is the 50/30/20 Budgeting Method Right for You?

The 50/30/20 budget is a popular budgeting method. However, not everyone should use it. The system may be a sound budgeting method for some, but it’s not right for everyone. The only way to know if the 50/30/20 budget is right for you is to consider your financial situation.

Having three categories to track may help you focus on your finances instead of getting lost in the details. Others, however, might need more categories to get a better understanding of their spending habits. You have to figure out whether you want something that’s less detailed or more structured.

Another thing to consider is that the 50/30/20 rule budget is a good guideline, but it might not work for everyone. Depending on how much you earn and where you live, 50% of your take-home pay might not be enough to cover your living expenses.

For example, people who live in high cost-of-living areas may have to spend most of their money on housing. This can make it impossible for them to spend less than 50% of their after-tax income on their needs.

Final Thoughts

The 50/30/20 budget is a popular rule of thumb that can help you get into the habit of having your money work for you. However, it’s important to know that there are many ways to give your hard-earned dollars a job. 

This budgeting method is a great way to get started if you’re new to budgeting. It’s an easy way to plan and track your spending and an excellent choice for those looking for a simple way to budget.  

If you find yourself struggling with budgeting, don’t be afraid to experiment. Remember, you can adjust the numbers based on your personal financial circumstances. But if you can’t make this budget work, try other budgets that are more suited to your specific needs.  

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