Budget. The “B” word. Ugh.

If you’re like most people, the idea of making a budget stirs feelings of dread. Fear. Maybe even nausea.

Feelings of budget reluctance are actually pretty normal. After all, creating a budget can feel like a chore. Even learning about how to make a budget can feel like yet another “to-do” taunting you from a never-ending task list.

But budgeting doesn’t have to be stressful, stifling or suck the fun out of your lifestyle. In fact, learning how to make a budget with the 50-30-20 rule could be your ticket to getting a handle on your finances while still doing the things you enjoy. The best part? Using the 50-30-20 rule to make a budget is straightforward and you only need to do it once.

Budgeting with the 50-30-20 rule

All you need to do to make a budget with the 50-30-20 rule is split your take-home pay (that is, after taxes and deductions) into three categories:

  • 50% goes towards necessities
  • 30% goes towards things you want
  • 20% goes towards savings or paying off debt

That’s it. Simple, right?

50% of your budget for necessities

Like zero-based budgeting, the 50-30-20 budget rule assigns each dollar a specific purpose. According to the 50-30-20 rule, half of your take-home pay should go towards paying for “must-haves” (sorry, daily coffees and streaming services don’t count). For instance, if your monthly take-home pay is $2,000, according to the 50-30-20 rule, you should allocate $1,000 to pay for your needs. This category includes any expense that you must pay and that is necessary for your survival, such as your rent or mortgage, groceries, insurance, transportation and utilities.

30% of your budget for wants

After necessities, it’s time to focus on fun. According to the 50-30-20 rule, you can allot 30% of your take-home pay to things you want. These are the “fun” expenses or items that make life enjoyable — vacations, shopping, restaurants, takeout and monthly subscriptions.

Now, 30% may not sound like much, but again, if your monthly take-home income is $2,000, then based on the 50-30-20 rule, $600 could go towards expenses that bring you joy.

20% of your budget for savings

The final 50-30-20 budget rule category is savings or debt repayment, and 20% of your take-home pay belongs here. The idea is that you’ll use this 20% to increase your financial net worth — either by lowering debt or increasing savings. This category might include pre-or post-tax retirement savings, student loan or credit card debt payments, investments or contributions to an emergency fund.

A quick word about high-interest loans: If you have a credit card with a high interest rate, making a balance transfer to a credit card with a 0 percent introductory APR rate may help you keep your payments manageable and potentially reduce your debt faster. Consolidating your debt with a 0 percent introductory interest (also called APR, or annual percentage rate) credit card might give you a golden opportunity to simplify your payments and get laser focused on paying off your debts as soon as possible.

The Bottom Line

Creating a budget is deeply personal. Depending on your specific situation, the 50-30-20 rule may or may not work for you. But whether you adopt the 50-30-20 budget rule or not, it may provide a useful framework for thinking about your financial goals while planning for the future and still enjoying the present

Published July 28, 2021

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