The beginner’s guide to budgeting with the 50-20-30 rule

Starting a budget can be tricky. Give yourself a head start with this budgeting trick.

Are you struggling to learn how to start a budget? Join the club. Figuring out the most effective way to divvy up your cash at the end of each month isn’t easy, regardless of whether you consider yourself a high or low earner.

“One of the biggest hurdles to starting a budget is that when people hear the term, they immediately think of all the things they might have to give up,” says Tyler Omoth, former senior writer at a personal finance website. “They don’t want to lose their freedom to dine out, grab a latte in the morning or keep their premium cable subscription.”

A group of friends enjoys time together at a coffee shop.

Good news: You can create a budget without giving up all the things you love. In fact, it’s those ultra-strict budgets that often result in people giving up on budgeting altogether. “If a budget doesn’t allow for any fun, it becomes a burden,” Omoth says.

One way to learn how to start a budget and take the burden out of budgeting is with the 50-20-30 rule, a favorite among financial experts and budgeting beginners.

Use this guide to start a budget with the 50-20-30 rule:

How does the 50-20-30 rule work?

The 50-20-30 rule works by breaking your spending into three key categories. Forget line items for dozens of different expenses. You don’t have to stress about having a specific budget for “clothing” or “entertainment,” for example. As long as all of your discretionary spending falls within the amount you’ve allotted, you’re solidly on budget.

When you start a budget with the 50-20-30 rule, your three budget categories will look like this:

  • Living expenses – 50%: This category includes essentials that you need to pay each month. Think rent, transportation, utilities and food.
  • Savings and investments – 20%: This portion of your budget includes money you are putting toward your financial goals, like your emergency fund or retirement account. If you’re paying down any debt, it would also fall here.
  • Discretionary spending – 30%: Thirty percent of your budget is for anything you want but wouldn’t say you need. It would cover all of your non-necessities, such as entertainment and travel.

“The beauty of the 50-20-30 rule is that it sets you free more than restricts you,” Omoth says. “Yes, you’re putting aside 50 percent of income for necessities and another 20 percent for financial goals, but it leaves you a healthy 30 percent of your income to use as discretionary money. It’s fun money, if you will.”

A woman, holding her baby, balances her budget using the 50-20-30 rule.

Yoni Dayan, editor-in-chief at a personal finance blog, favors the 50-20-30 rule for those just learning how to start a budget. “The 50-20-30 rule is a fantastic way to think about budgeting,” Dayan says. “It’s simple, generous and, most importantly, realistic.”

How do I start budgeting with the 50-20-30 rule?

As with any kind of budget, the key to start budgeting with the 50-20-30 rule is to have a clear picture of your current finances. You need to know how much money you bring in each month, which means looking at your paycheck and factoring in any additional income streams (side gig, anyone?). If you’re self-employed or your monthly income is variable, you can work from an average monthly figure—simply take your income from last year and divide it by 12. When you budget with the 50-20-30 rule, keep in mind that you need to focus on your after-tax income, which is what’s left of your paycheck after taxes have been taken out.

To start a budget with the 50-20-30 rule, you’ll then need to account for your monthly expenses. Take a look at your bank and credit card statements for the last three to four months. Track every cent you spent, whether it was on rent, your gym membership or your favorite treat-yourself item. You can do this manually with a pen and paper, use a spreadsheet or leverage a budgeting and spending app. By looking at your expenses for previous months, you’ll have an idea of what you spend on a regular monthly basis.

“The 50-20-30 rule is a fantastic way to think about budgeting. It’s simple, generous and, most importantly, realistic.”

Yoni Dayan, editor-in-chief at a personal finance blog

How do I adjust my spending to meet the 50-20-30 rule?

With every dollar and cent accounted for, you’ll need to go through your expenditures and allocate each transaction to one of the three categories. When you are learning how to start a budget, it’s okay if you don’t hit the 50-20-30 ratio right away. You can tweak your spending over time and eventually work up to that ratio. “Use it as a guideline,” Dayan says, “as a means to becoming a healthy and financially responsible adult.”

For instance, if you start budgeting with the 50-20-30 rule and find that your living expenses take up way more than 50 percent of your budget, you can gradually start making changes to bring those expenses down. If gas is eating into your transportation costs, for example, maybe you hit public transportation more regularly. If your grocery budget is accounting for way more of your family’s living expenses than you thought, searching for coupons and special deals could be the way to go. As you build momentum, you can look toward more long-term solutions, like bringing down housing costs with a new apartment or refinanced mortgage.

If you’re budgeting with the 50-20-30 rule and find your discretionary spending is taking up more than 30 percent of your budget, you can look for easy ways to save on everyday expenses, like packing leftovers for lunch instead of eating out or bringing your own snacks the next time you head to the movie theater.

What are the benefits of budgeting with the 50-20-30 rule?

Like any effective budget plan, starting a budget with the 50-20-30 rule helps you get your finances in order.

By focusing on only three categories, you can simplify the process and make budgeting feel less intense—which is especially important if you’re learning how to start a budget for the first time. Since the 50-20-30 rule helps you understand how to break down and categorize your expenses, it can highlight areas where you could stand to be saving more.

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“It works because, if most of us took a hard look at our expenditures, we’d probably find that we’re actually spending more than 30 percent on non-necessities,” Omoth says. “But instead of eliminating dining out, it may make you cut back to one night per week or so. Small sacrifices allow you to choose where you want to use that money.”

If you start a budget with the 50-20-30 rule, you can more easily tell you if you’re spending more than you can really afford, particularly on living expenses and necessities.

“The 50-20-30 rule makes you look at your necessities, such as housing and utilities, and make them fit under that 50 percent umbrella,” Omoth says. “If your rent or mortgage is taking up 60 percent of your income, you’re probably living beyond your means.”

And perhaps most crucially, the plan encourages you to think about your financial goals. Whether you’re saving for a house, looking to reduce your debt or planning a once-in-a-lifetime vacation, budgeting with the 50-20-30 rule can help you prioritize your goals and take steps to achieve them. To help make these goals a reality, you may consider opening a high-yield savings account, such as the Discover® Online Savings Account. Growing your savings with an account like this can help magnify the impact of this simple, yet powerful budgeting rule.

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