How the 50/30/20 Budget Works

One of the hardest parts of creating a budget is figuring out how much money you should spend on all your expenses. What's the right amount to spend on housing? Or transportation? Or entertainment? Having a guide to building a budget helps keep your spending in line. That's one of the benefits of the 50/30/20 budgeting method. Your spending on certain categories is kept within a certain percentage of your monthly income, so you can figure out just what you should spend each month.

50% - Monthly Needs

Half of your monthly income should be spent on your needs. This includes things like housing, transportation, utilities, minimum payments on debt, insurance, childcare, and other essentials. No matter how much you feel you can't live without them, cable television, gym membership, or streaming subscriptions don't go in the needs category.

30% - Wants

All those extras should fit within this category. Clothes, subscriptions, non-work travel, and dining out are examples of wants. If it's not an essential life expense, it falls within this category. Be careful not to confuse wants and needs - you could end up allocating too much money toward one budget category and not enough money to another.

20% - Saving

You're more likely to save money if you have it built into your budget. If you make $6,000 per month, you should save at least $1,200. This also includes money you invest or money to pay off your credit card debt.

Adjusting the rest of your spending to fit within 80% of your incomes make saving more comfortable. And of course, you can save more if you can afford to. Having a sizable savings account gives a larger cushion to use in case of emergencies or even to fund your retirement.

Don't make the mistake of spending on needs and wants first then trying to budget what's leftover. You're more likely to run out of money and not have enough to sufficiently build your savings.

Making It Work for You

You can always use the 50/30/20 budget as a starting point, rather than a hard figure, adjusting the categories accordingly to fit your financial situation. For example, if you need to aggressively pay off debt and you're willing to forgo some wants, your budget split might be 50/10/40. Or if you've kept your essential expenses low and you want to put more money towards retirement, something like 35/20/45 might be better for you. As long the total percentage doesn't exceed 100% - in which case you'd be overspending - your budget is just fine.