Making a budget is a lot like going to the dentist: Not fun, but usually less painful than your nightmares make it seem. And the more consistent you are, the less likely you’ll have (financial) health problems later. Meet the 50/20/30 rule, a straightforward and pretty easy way to start budgeting.
That’s a big promise.
We can deliver. Start by looking up your take-home pay, or the amount that hits your bank account on payday. Add up how much you bring in each month. That’s what you’ve got to work with. Next, make a list of your regular monthly expenses. If you need a cheat sheet, look up old bank and credit card statements.
Okay, then what?
Sort all your expenses into three categories: needs, wants, and future goals. The 50/20/30 budget says the ideal breakdown is this:
50% of your money goes toward basic needs
20% is for money you can use to pay for retirement and other big life goals
30% goes toward everything else
Let’s start with the 50%. These are your bare-minimum expenses that keep the lights on in your life. Literally. Because utility bills are in this category. Along with things like:
Rent or mortgage
Gas and/or public transportation costs
Phone and Internet
Minimum debt payments
Got it. What about the goals category?
Giving this part of your budget some love might feel like a sacrifice now. But future you will be glad you did. Your 20% should include saving for emergencies, investing for retirement, and money for other life goals. Like buying a home one day or going on a dream vacation.
If you’re working on getting out of debt ASAP, respect. You can put your extra payments in this category, too. The bare minimums are already accounted for under ‘needs.’
Still waiting to find out where to budget for Netflix and chilled wine.
Here you go. You can spend the last 30% of your take-home pay on those things or whatever else you want. 3D puzzles, subscription boxes for your dog. No judgments. Think of this as the upgrade category. Groceries are a need, but ordering in is a want. Replacing your winter coat is a basic need, but extra clothes shopping falls into this bucket.
Related: Easy Ways to Save Money On Food
What if my expenses don’t fit into these categories?
You’ve got two options. If you’re spending more than half your take-home pay on needs, one option is to cut back. Pro tip: Call up your phone or cable company and ask for the retentions department. They’ve got the power to actually give you a discount if you threaten to cancel your service.
The other option is to "borrow" some cash from your wants category, which is more flexible. Try to keep goals at 20%. Or at least work toward getting there.
The 50/20/30 rule takes the sting out of budgeting. And doesn’t make you track every single dollar. One way to keep yourself on track is by automating the 20% piece: set up transfers from checking to savings or your credit card bill on payday. Outta sight, outta debt much faster.
PS: If the 50/20/30 budget cramps your style, take this quiz to find out a better one for you.